Most retail investors own a portfolio of publicly traded stocks and bonds to fuel their retirement. But high-net-worth family and institutional investors use vastly different tools.
When retail investors buy a bond, stock or ETF, they are investing in or lending money to a publicly traded company. Currently, there are about 3,500 publicly traded companies with over $100 million in annual revenue. Conversely, there are about 18,000 companies that aren’t publicly traded with over $100 million in annual revenue. Some notable examples include Publix, Burger King, Fidelity Investments, SpaceX and OpenAI.
Just because a company isn’t publicly traded doesn't mean you can’t invest in it or lend money to it. You can invest in private companies by investing in a private equity fund.
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Investing in private equity
According to investment data company Prequin, since the end of 2000, the global private equity index delivered an annualized return of 10.5%, while a global public equity portfolio produced a 7% return. That’s a 3.5 percentage-point difference in average annual returns. One of the reasons for this outperformance is it’s cheaper to invest in private companies than public stocks. When you invest in the S&P 500, you are paying almost 28 times earnings, as of 2025. When private equity funds invest in private companies, they may pay only six to 15 times earnings.
Historically, private equity funds have been available only to ultra-wealthy families, institutions and endowment funds. Today, they are available to most affluent accredited investors. Accredited investors, individually or with a spouse, have a net worth of at least $1 million (excluding their primary residence).
Investing in private credit
While most retail investors buy bonds or bond funds to diversify their portfolios, the best-performing income asset class over the past 20 years has been private credit. Private companies can’t issue bonds like publicly traded companies. Also, banks typically don’t make operating loans to private companies. When private companies need to raise capital, they often borrow from private credit funds — and pay a high rate for the funds they borrow.
However, these companies can use the short-term loans to increase corporate profits. While investment-grade bonds may yield 4% to 5%, private credit funds are yielding about 10%. Private credit funds have similar volatility to investment-grade bonds and fewer defaults than high-yield bonds, with superior yields to both asset classes.
While private credit funds were historically available to the ultra-wealthy, they are now available to accredited investors. Knowledgeable affluent investors use bank notes (a form of private credit) to beat the stock market when it’s appreciating and lose less when stocks are going down.
It is hard to know which manager will outperform or which stocks will go up the most. Bank notes linked to stock indexes currently allow investors to double the returns of the index on a guaranteed basis with less investment risk than owning the index. These notes are subject to the credit risk of the issuing banks, so it is wise to work with the strongest banks.
Taxes and private placement life insurance
One problem with making a large profit from your investments is the fact that the government wants its share. Therefore, investors must pay taxes on their realized gains and the generated income. Since the ultra-rich tend to be in the highest tax bracket, they would prefer not to pay taxes on their investments.
One of the strategies they use to avoid those taxes is private placement life insurance (PPLI). Under IRS Section 7702, all realized gains and income that occur within a life insurance policy are not taxable. The policy owner can take tax-free withdrawals and loans from the contract. Plus, all proceeds are income tax-free to the beneficiary at the insured’s death.
But the ultra-wealthy aren't buying traditional “off-the-shelf” life insurance policies that earn 4% to 5% per year. They are using private, custom contracts that allow them to invest in private equity, private credit, structured notes and other alternative investments with high expected returns.
They can invest the same way they were going to invest inside or outside the insurance contract, but if they invest inside of the PPLI insurance contract, they will not owe state or federal income taxes. A $5 million investment made over four years growing at 8% taxable will grow to about $12.5 million over 20 years. But the same investment in a PPLI will grow to about $17.5 million. Historically, you needed about $20 million to own a private placement life insurance policy. But now, investors with as little as $2 million can own one and avoid taxes like the ultra-wealthy.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Singer Wealth Advisors is an SEC registered investment advisory firm. Registration with the SEC does not imply a certain level of skill or training. SWA is not a tax professional. Discuss with your financial/tax professionals before investing. Investing involves risk. Past performance does not guarantee future results. Material provided for informational purposes only.
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