What to Expect After You Invest in Private Equity or Debt?

Understanding the typical private equity and debt investment lifecycle

Private investments such as private equity and debt are often designed to be held for years. During that time, an investment may generate income, require additional funding, change in structure, increase or decrease in value, or experience an event that ultimately ends the investment. When a private investment is held in a self-directed IRA (SDIRA), those activities take place within the retirement account. Understanding the typical lifecycle of a private investment, and when action may be required, can help investors know what to expect from the initial purchase through the eventual exit.

While every investment is different, most private investments move through several common stages.

1. Acquisition 

The life cycle begins when you direct your SDIRA custodian to purchase an investment you have selected. Because the IRA is making the investment, the investment must be registered or titled in the name of the IRA rather than in your individual name. Your custodian reviews the transaction for custodial requirements, executes applicable investment documents on behalf of the IRA, and sends funds from the account to the investment sponsor or issuer to complete the purchase. Once the transaction is complete, the investment becomes an asset of your SDIRA and is reflected in your account records.

2. Holding and managing the investment

After the initial purchase, a private equity or private debt investment may remain in your SDIRA for years. During this holding period, the investment may generate income, require additional capital, change in value, or experience other activity that requires attention. Understanding the anticipated investment lifecycle can help you prepare for activity that may require additional funds, documentation, or instructions.

Depending on the investment, your IRA may receive dividends, interest, principal payments, or other proceeds. It may also encounter capital calls, investment-related expenses, updated ownership documents, or changes to the investment's terms or structure. Because the IRA owns the investment, income and proceeds generally return to the IRA, while investment-related expenses generally must be paid with IRA funds. 

Maintaining available cash

Because private investments can be illiquid, it's important to consider the cash needs of your SDIRA throughout the holding period. Maintaining available cash can help cover ongoing account fees, investment expenses, capital calls, or future distributions (such as required minimum distributions) without requiring an investment to be sold unexpectedly.

Updating valuations

Private investments require an updated fair market value (FMV) each year. Unlike publicly traded securities with readily available market prices, the value of a private investment is typically provided by the investment sponsor, issuer, or an independent qualified third party. Your custodian uses the reported value to update the account and complete required IRS reporting, including Form 5498. A current valuation may also be required for certain distributions, conversions, or other reportable transactions.

When losses happen

The value of a private investment can increase or decrease throughout the holding period, and some investments may ultimately become worthless. A significant decline in value or removal of a worthless asset generally requires supporting documentation. Losses within an IRA generally do not create a current tax deduction. Instead, they reduce the value of the retirement account. Investors should consult a qualified tax professional regarding their individual circumstances.

Some private investments require very little activity between purchase and exit, while others may require ongoing instructions and documentation. Staying informed about your investment and responding when action is needed can help keep it properly maintained within your SDIRA. 

3. Exit events and timing

Eventually, many private investments reach an event that provides liquidity or concludes the investment. A private company may be acquired or go public, a private fund may sell its underlying investments and wind down, or a promissory note may mature and be repaid.

When an IRA-owned investment is sold, redeemed, or otherwise liquidated, the proceeds generally return directly to the IRA. Once the custodian receives the appropriate proceeds and documentation, the investment can be removed from the account. The resulting cash remains in the IRA and can generally be held, reinvested, or distributed according to applicable IRA rules.

Selling the investment isn't always the only option. If an eligible asset can be transferred, an investor may choose an in-kind distribution, transferring some or all of the investment from the IRA into their personal ownership rather than liquidating it first.

An in-kind distribution is reported as an IRA distribution based on the applicable fair market value of the asset at the time of distribution. Traditional IRA or Roth IRA distribution and tax rules apply, and investors should consult with a qualified tax professional before making a distribution decision. Once the transfer is complete, the distributed portion of the asset is no longer owned by the IRA.

The custodian's role throughout the investment lifecycle

Throughout the investment lifecycle, your SDIRA custodian holds the asset on behalf of your IRA, processes transactions according to your instructions, maintains account records, and completes applicable IRS reporting. The custodian does not provide investment advice, evaluate investment performance, or make investment decisions on your behalf.

As the investor, you are responsible for monitoring your investment and providing instructions or documentation when action is required. Understanding the typical stages of a private investment can help you anticipate those responsibilities from the initial acquisition and years of ownership to the investment's eventual exit.

Access the forms, answers, and guidance you need to confidently manage private equity, debt, and other non-traditional investments at STRATA's dedicated Client Support-Private Asset page. For deeper education on investing with an SDIRA, explore STRATA’s Self-Directed Knowledge Center. Our SDIRA specialists are also available to help with administrative requirements throughout the life of your investment.