Edited By Sunita Arnold, Jul 18, 2023
Private market investing is a time-tested approach for investors looking to boost companies that have not yet gone public. Ranging from startups to established firms, the investment companies carry great potential, along with risk.
For those investors who choose wisely, private marketing investing can be a lucrative and exciting way to earn returns.
Table of Contents
Private markets are investments made in equity or debt in companies that are not traded on a public exchange. Private debt and private equity help businesses raise critical capital that’s used for growth or acquisitions.
Examples of private market investing include startup companies looking for initial funding. They can also include more established companies seeking to expand to new markets or develop new products.
Investments in private markets are controlled by private equity firms, which raise funds to purchase companies or shares of companies. Other private market investors invest in alternative assets such as real estate, agriculture, timber, crypto or collectibles.
Private markets differ from public markets in several key ways. Public markets are those that offer shares in companies that are traded publicly on various exchanges.
Public market economics is at the core of the U.S. financial system. Publicly held companies provide shares and use the proceeds to drive growth and expansion. In those ways public and private markets are very similar.
Public markets are well-known entities. The New York Stock Exchange, NASDAQ and the London Stock Exchange are all public markets examples.
The importance of public market trading is considerable and is the type of investment done by most people.
Public market vendors are those that sell the stocks, bonds and other instruments routinely available on public exchanges. Banks, other financial institutions and mutual funds are among the most common vendors for public markets.
However, public markets are typically much more transparent and are subject to more regulations. Companies on public markets need to provide quarterly and annual reports that detail their operations, revenue and profits. In addition, there are clear rules governing reporting and how officials must act.
There’s a vast difference in the size of the two marketplaces. According to Statista public market research, the total market capitalization of U.S. companies is $108 trillion as of April 2023. That compares to $10 trillion of assets under management by private markets in 2021, according to McKinsey.
The advantages and disadvantages of public market investing are:
Advantages
Disadvantages
Private markets also have advantages and disadvantages:
Advantages
Disadvantages
Private market investment examples run the gamut. One example is a private market fund focused on biotech companies. The fund, which can be tens or hundreds of millions of dollars in size, is open to certain investors.
Typically, private market funds attract institutional investors, such as pension funds or endowments. They can also target high-net-worth individuals.
The fund will raise the money necessary to acquire shares or whole companies in the biotech space. These may be companies that are developing new therapies or medical devices.
The portfolio of investment companies can include both startups and established businesses.
Funds may focus on different types of investments. Among the most common are:
Venture capital is typically used to fund startups and new companies that have a high return potential. There are different rounds or phases of venture capital that companies vie for. The ability to attract later rounds of venture capital depends on delivering on promised results.
Venture capital investors often play a close role in the development and leadership of the company.
Designed for established companies, growth capital financing is relatively small and reserved for a specific purpose. It may be used to fund expansion into a new market or to acquire a company.
Investors in growth capital usually take a minority share of ownership.
These funds use a combination of investments and debt to finance companies, often positioning them for a sale. In a leveraged buyout, the investors take control of the company and position or reposition it.
Private market investing has historically been limited to a select group of investors. To invest in private equity, the U.S. Securities and Exchange Commission requires you to be an accredited investor. To be an accredited investor, you must either:
Asset classes are groups of investments that have the same characteristics. They are also usually subject to the same laws and regulations. Each asset class has its own tendencies and patterns of investment returns. Often there is little correlation or a negative correlation between the investment traits among asset classes.
Here is a closer look at the most common asset classes.
Cash and Cash Equivalents
Cash and cash equivalents typically carry very low risk and therefore have modest investment returns. Examples include savings accounts, U.S. government Treasury bills and money market funds.
Commodities
Commodities are goods that can be converted into other goods or services. Examples include agricultural products, energy sources and metals. They are often viewed as a hedge against inflation because they are usually in demand.
Equities
Equities are shares in a company that are issued to provide income. Companies use the proceeds from the sale of shares to grow and meet operating requirements. Investors earn money from dividends, which are payments on shares held, or when selling their shares.
Fixed Income
These investments are those that pay a fixed amount on the principal until the maturity date. At that time, the initial investment is returned to the investor. Government and corporate bonds are the most common fixed income assets.
Alternative Assets
Alternative assets are those that are not commonly traded on public markets. They include real estate, collectibles, artwork and cryptocurrencies.
Many private market asset classes are considered alternative assets, such as private equity funds, venture capital and hedge funds.
Private real assets are a subclass of private assets. They include assets that are physical in nature and are often illiquid, including farmland, timberland and infrastructure.
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Private market investing platforms are a relatively new way for investors to access private markets. They are online portals that allow investors to access information, insights and details about potential investments. In some cases, the private market investment platform allows investors to choose the investment companies directly.
There are two common kinds of private market investing platforms.
Private equity investment platforms allow investors to gain exposure to the equity of private companies. These are investment platforms that let investors choose private companies to invest in and provide insights to guide investment decisions.
Linqto is one example of a great equity investment platform.
Linqto offers a zero-fee structure and can be used by individuals, IRA providers, custodians, private funds and industry associations.
With Linqto, investors can invest with as little as $5,000 and choose from a range of industry verticals, including artificial intelligence, gaming, and blockchain. Investors can learn about the company’s valuation, history, location, products and services, and market.
Unlike other private equity investment platforms, Linqto also offers investors liquidity and no lengthy lock-up periods.
Broker investment platforms are private equity companies that act as brokers and dealers. They offer access to private equity funds but charge management fees to their investors.
Like other platforms, they provide access to insights, data and information about potential investments. Examples include EquityZen, Forge Global and InvestX.
Private market companies are those that have chosen to remain private and not go public. Many companies choose to remain private to control their own destiny. They retain operational and financial control. However, they may bring on investors who are responsible for steering the company in new directions, preparing it for sale or driving value.
The largest private company, according to Forbes, is Cargill, the food and drink business, with $165 billion in revenue. Other top private companies include:
Returns for any investment vary greatly. However, a closer look at the long-term returns indicates that private equity is a stronger investment.
The U.S. Private Equity Index, managed by Cambridge Analytics, shows a 10.48 percent average annual return over 20 years. That’s in sharp contrast to the Russell 2000 index, which reported 6.69 annual returns for public small businesses.
Measuring the size of the U.S. and global private equity markets can be challenging. While McKinsey reported the size of the U.S. market at $10 trillion, a U.S. Senate report measured the size at $4.4 trillion.
The impact of private market investing, no matter who measures, is significant. The Senate report noted there are more than 18,000 private market funds and employs 11.7 million people.
A McKinsey study in 2023 noted that the global market for private equity was at $11.7 trillion as of June 2022. Assets under management had grown at an annual rate of nearly 20 percent since 2017.
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Many often wonder about the difference between private equity and venture capital. In reality, venture capital is considered a subset of private equity. However, there are major differences in how venture capitalists approach their work from others in private equity.
Venture capital is typically interested in investments in new and high-potential companies. They are looking for companies that are likely to deliver large returns and have promising products or services to offer.
There’s more risk associated with venture capital. Why? Because of the nature of the investments.
Venture capital’s focus on early-stage businesses means there’s more of a risk of those businesses failing.
Private equity, especially growth capital and leveraged buyouts, typically looks for more established companies for investment.
Private equity funds are closed-end structures with a finite life cycle. They include partners who are responsible for raising the investments that will fuel the fund. Partners will also hire staff to manage the companies that are part of the fund.
Investors become limited partners in the fund. They invest a minimum amount, often millions of dollars to become partners.
Over the lifespan of the fund, the companies are expected to grow, go public or be acquired. At the conclusion of the fund, the fund pays back the investors’ initial investments and earnings. The fund also retains management fees annually and a percentage of the investment gains.
Private equity firms launch and manage private equity funds. A PE firm takes on multiple roles. Its core employees are principals with expertise in raising funds, helping manage companies and leading change.
Once a private equity firm buys a company, it begins to overhaul the company and improve its efficiency, products and operations. The plan is typically for the firm to resell the company at a much higher price, driving profits for all investors.
Working in a private equity firm often requires extensive experience in alternative investments, banking, finance or a specialty field. Often private equity employees earn an MBA or other graduate degrees in finance.
Another path is to become a chartered financial analyst (CFA). In the private market CFA certifications often are required or the firm pays for new employees to obtain the credential.
Many individuals, after working in private equity or for an investment bank, will start their own private equity firm. Doing so requires capital, a strong business plan, and access to investors to help establish a fund.
Private markets are an attractive alternative investment option. While they are not as large as public markets traded on exchanges. They historically have yielded stronger returns.
Understanding the private market types, advantages and disadvantages can provide you with the skills for a lucrative investment journey.
This material, provided by Linqto, is for informational purposes only and is not intended as investment advice or any form of professional guidance. Before making any investment decision, especially in the dynamic field of private markets, it is recommended that you seek advice from professional advisors. The information contained herein does not imply endorsement of any third parties or investment opportunities mentioned. Our market views and investment insights are subject to change and may not always reflect the most current developments. No assumption should be made regarding the profitability of any securities, sectors, or markets discussed. Past performance is not indicative of future results, and investing in private markets involves unique risks, including the potential for loss. Historical and hypothetical performance figures are provided to illustrate possible market behaviors and should not be relied upon as predictions of future performance.
As Director of Content Strategy at Linqto, Sunita deftly merges creative and strategic planning. Guiding a talented team, she aligns content with marketing objectives to deliver compelling, brand-consistent materials. Her diverse 15+ year career spans fintech, healthcare, and public relations, with highlights including managing investor relations for an alternate investment platform, steering business development in a leading PR firm's sports and entertainment sectors, and overseeing operations for a wealth management data service. Her past achievements include significantly contributing to the growth and efficiency of a top global fund administrator. Keeping pace with industry trends, Sunita applies her strategic acumen and market insight to advance Linqto's content strategy.
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