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The Private Market Advantage

The Private Market Advantage

private markets advantage
4 minutes read
Contents

The Changing Landscape of Public Markets

Over the past few decades, the landscape of public markets has undergone a significant transformation. The number of publicly traded companies in the U.S. has dwindled, shrinking by almost 50% over the last 25 years. In 1996 there were 8,090 publicly traded companies, but by 2019, this number had decreased to just 4,266. Moreover, only a fraction of U.S. companies with annual revenues exceeding $100 million are public, leaving more than 18,000 private companies of significant scale out of reach for public investors.

This shift is not limited to quantity alone; it also pertains to the quality and growth stage of companies going public. Today, companies are tending to go public at a later stage of their development. In the technology sector, for example, the average age of a newly listed company has risen from five years in 2000 to a staggering 15 years in 2022.

The Private Market Advantage

Unlike their public counterparts, private markets offer a wealth of opportunities for investors seeking diversification and substantial long-term growth. Let’s explore why these markets deserve more attention:

1. Historical Outperformance

Private equity, a significant player in the private markets, has consistently outperformed public equity markets over various time periods, both in the U.S. and globally. The data speaks for itself, with private equity delivering impressive returns for investors.

2. Size and Scope

The private market is vast, with approximately seven million private U.S. companies. The top 246 private companies alone boast combined revenues of nearly $1.9 trillion and employ four million people. Middle market businesses, representing a third of private sector GDP, generate more than $10 trillion in annual revenue, with about 91% of them being privately held. Despite this, the majority of investors have minimal exposure to this market.

3. Illiquidity as a Benefit

One of the key characteristics of the private market is its illiquidity. While this may initially seem like a drawback, it can actually be a significant advantage. Illiquid investments discourage panic selling during market downturns, promoting a “buy and hold” mentality. Private equity managers are skilled at timing exits to maximize value, a feat rarely achieved in the public markets.

4. Long-Term Focus

Private equity professionals prioritize long-term value creation, working closely with portfolio companies to execute strategic plans. This focus on the long term sets private equity apart from public equity, where short-termism often prevails.

Overcoming Obstacles to Access

While the benefits of the private market are compelling, two main obstacles have historically deterred investors: lack of liquidity and limited access to quality fund managers. However, a paradigm shift is underway:

1. Liquidity

The conventional 60/40 portfolio, heavily reliant on daily liquidity, may not be the best strategy for individuals with long-term financial objectives. Illiquid investments, like those in the private market, remove the risk of panic selling during market downturns. Studies have shown that investors can sustainably manage allocations to illiquid assets, depending on their spending needs.

2. Access

Access to quality private market investments has historically been limited for individual investors. However, technology-driven platforms are changing the game. These platforms offer eligible investors access to high-quality private market funds at lower minimums, along with transparent due diligence, traditionally reserved for institutional investors.

In Conclusion

In an environment characterized by market volatility, investors are increasingly seeking uncorrelated sources of return to safeguard their portfolios. The private market presents a unique opportunity to achieve diversification and long-term growth. It’s time for investors and advisors to embrace the private markets as a core component of their portfolios, leveraging the full toolkit available to tap into this wealth of opportunities.

With nearly half of global wealth in the hands of individual investors, the private markets are ripe for exploration. Innovative solutions and technology-enabled platforms are making it easier than ever to access these markets, ensuring that the benefits of private investments are within reach for all.

As you consider your investment strategy, remember that the private markets offer a world of potential beyond what’s visible in the public domain. It’s time to unlock the power of private markets and harness their potential for diversification and growth.

ENDNOTES

  • The World Bank, as of May 10, 2023.
  • Hamilton Lane, “Private Market Investing: Staying Private Longer Leads to Opportunity,” April 14, 2022.
  • Ewens, Michael and Joan Farre-Mensa, “The Deregulation of the Private Equity Markets and the Decline in IPO,” The Review of Financial Studies, Volume 33, Issue 12, Dec. 2020.
  • University of Florida, Warrington College of Business, Initial Public Offerings: Updated Statistics, as of Sept. 12, 2023.
  • Stock Analysis, All 2021 IPOs; prices reflect intraday trading, as of Sept. 21, 2023.

 

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