Private markets are perhaps the most obscure of the different asset classes that make up an investor’s portfolio, so let’s start by stating the obvious: private-market investments, as their name suggest, are not ‘public’. In other words, the instruments you’re investing in are not traded openly on a stock exchange like the Nasdaq or SIX Swiss Exchange, and as such they’re not subject to the same market fluctuations or indeed the same regulatory requirements as public investments.
The three sectors of private markets
Essentially, private markets comprise three distinct sectors: private equity, private credit and private real estate. Private credit is a small sector in which investors provide privately negotiated loans to lenders such as businesses, startups and individuals. Private real estate, which accounts for around a quarter of private-market investment, is where investors stake their money in buildings, land and infrastructure and achieve returns through rental income or upgrading the asset for resale (read more here). In this article, we’ll focus on private equity, which makes up about 60 percent of the private market landscape.
Private equity: Opportunistic value
Private equity is an approach to investing where investors invest directly in private companies, or in public companies that are subsequently taken private and are therefore no longer listed on the public stock exchanges.
There are three different stages of involvement in private equity:
- Venture capital: Investing in startups
- Growth equity: Helping companies grow further
- Leveraged buyouts: Where companies need to be transformed and sold on
The process starts when the private equity company raises funds among investors or institutional entities, such as insurance companies or pension funds, before earmarking potential companies to invest in.
The target companies are typically chosen because of their growth potential because they are undervalued, or because they could benefit from restructuring. Once the company is acquired, the private equity company collaborates closely with the company’s management – usually over several years – to improve its operations and performance with the aim of selling the company at a profit.
The lure of high returns and low correlation
Many of the companies targeted by private equity managers are in high-growth sectors and can scale rapidly, making them a very enticing prospect for investors in terms of generating returns. In fact, many of the most innovative and disruptive companies can be found within the realm of private markets. These trailblazing companies often stay private for longer periods, allowing their investors to share in their success.
Investors are also drawn in by the fact that returns in private markets generally have a low correlation to public indexes. The companies being invested in lie “outside” the market and are less exposed to the ups and downs of the wider economy, which is a useful way for investors to diversify their portfolio.
How to invest in private equity?
Many investors believe that investing in private equity may be beyond their reach because of the high minimum investment required. While it’s true that direct investments in companies are often open only to those with vast quantities of capital to commit, there are several other ways to enter the world of private equity investing.
Private equity funds
One way investors with more moderate levels of wealth can access private equity is through private equity funds. These funds pool money from many investors to invest in private companies and delegate the task of investing at a company’s specific development stage to fund managers to make use of their industry expertise.
This can also mean greater diversification since funds could invest in multiple companies representing many different phases of venture capital and industry sectors.
ETFs
Many wealth managers and brokers also offer access to exchange-traded funds (ETFs) on public indexes and allocate a part of the investor’s funds to private markets. Alternatively, you might choose to invest in the public shares of firms that manage and deal in private assets or in funds that track them.
Your assets are not locked away
As with any other type of investment, it’s important that investors consider their risk and return profile before participating in private-market investments. Investors typically commit their capital for a lengthy period, around 10-12 years, during which their funds are not easily accessible. However, with the rise of the secondary market, it has enabled investors who need access to their cash to have the ability to sell their stakes to other interested parties.
Perhaps most importantly when participating in private equity is the need for expertise. These are highly active investments that require significant know-how to ensure professional management of the investment, for example, at the different stages of the company or asset’s development. It’s therefore paramount that you rely on a wealth manager to scrutinise the type of investment you would like to make and understand if your financial objectives and preferences fit with the investment.