Private market investing is a win-win for investors and private companies. While private marketing investing carries big risks for investors, it can also bring rewards. Private market investing also gives business owners financial and mentoring support as they navigate various growth stages.
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Financial analysts characterize 2022 as a turbulent season due to the uncertain economic environment and geopolitical instability, yet they’re expressing much optimism for private market investing in the coming year. Blackrock is calling it “a new era for investors” and PwC is calling it the “asset class of the moment”.
Here’s a general overview of private markets for accredited investors and anyone who wants to learn more about private market investing.
Simply put, private market investing refers to individuals who invest in assets or debts of private companies rather than publicly traded companies. Certain investors can purchase general stock in a private corporation, but they can’t trade it on a public exchange such as NASDAQ or the New York Stock Exchange.
What makes private market and public market investing similar is they both provide a vehicle for companies to raise capital and investors can make or lose money in either private market or public market investments. The chart below describes their differences.
|Private Companies||Public Companies|
|Only a minority of investors and investment companies can invest||Anyone can invest|
|Investments are usually limited to 5-7 years||Investors can buy and sell shares anytime|
|Investors mentor companies and have a say in how they grow||Investors aren’t actively involved yet they have a vote in meetings|
|Doesn’t require transparency||Requires transparency|
|Investors invest in early-growth-stage companies||Investors typically invest in established companies|
Private market investing is not the same as investing in private equity. Only accredited investors may invest in the private markets, whereas private equity markets are accessible to a broader range of individuals.
Here’s a snapshot of how a private equity firm works. Limited partners (accredited investors) provide the capital to fund private equity firms. Private equity firms give funds to private companies (and sometimes public companies), and the private equity firms manage the funds. This is called direct investing. Private market investors must qualify as accredited investors which means they must have great wealth or have a high net worth.
Investors may also invest indirectly by buying publicly-traded equity stocks, exchange-traded funds (EFTs), or fund of funds which is called indirect investing. Such investors don’t need to meet the same wealth standards as accredited investors.
There are two ways to invest in the private markets – either by investing in private companies or by investing in private equity. Only wealthy individuals with investing experience may directly invest in private companies because this type of investing is very risky. Less wealthy people may invest in private equity which is less common than direct private market investing.
While there are notable differences between public and private investing, there are also notable differences between private markets and private equity markets.
Next, we’ll explain what a private market fund is and give you some examples.
The SEC describes a private market fund as “an entity created to pool money from multiple investors – often referred to as limited partners”. This means individual investors make an investment into the fund by purchasing an interest in a private equity firm. Each fund has an adviser who makes investments on the fund’s behalf.
The ultimate goal for investors is to increase the value of a company and then sell their stake in the company at a more mature stage to make a profit.
Private market funds try to group funds that have similar characteristics together as they tend to perform similarly in the marketplace, and you’ll learn more about the private market asset classes next.
A private market asset class is a group of financial securities that will likely perform much the same. Each classification is subject to the same laws and regulations.
While public markets offer mainstream investments, private markets offer alternative assets, and they play a vital role in the global economy. According to BlackRock, “Private markets now play a key role in institutional portfolios and as vital sources of equity and debt financing for companies, real estate, and infrastructure.
A fund created and managed by investors of a certain private equity firm.
Financing provided to startup companies and small businesses that have strong potential for long-term growth.
Investors form a limited partnership and allow professional fund managers to use various strategies such as investing borrowed money or trading non-traditional assets to earn above-average returns.
Investors may leverage cryptocurrencies (also known as virtual currency or digital currency) as part of EFTs and mutual funds.
Private debt funding refers to investors who provide funding to private companies that can’t or won’t acquire funding from a traditional bank.
Investors may purchase residential apartments, office buildings, self-storage units, or vacation homes as investment properties as a form of alternative investment.
Investments in commodities are investments in tangible goods that people use every day. Commodities can be raw materials, agricultural products, precious metals, or anything else people buy.
As it pertains to an alternative asset class, infrastructure refers to an investment in services, installations, and facilities that are essential to how societies function.
There is a market for fine art pieces, prints, and collectibles and by investing in the right pieces at the right time, investors can net a nice profit in this classification.
|Public Asset Classes||Private Asset Classes|
|Limited to stocks, bonds, and cash||Greater diversification|
|Offers common stocks and preferred stocks||Lower volatility|
|Entitled to vote in shareholder meetings||Generally outperforms stocks|
|Receive dividends||Illiquidity – cannot easily be exchanged for cash|
Now that you have an understanding of the basics of private market investing, we’ll take a closer look at private equity.
Private equity falls under the umbrella of private market investing. Unlike public investing and private market investing, private equity refers to investment partnerships that purchase companies and manage them for a time before selling them to make a profit.
Generally, private equity investors acquire mature businesses in traditional industries that may be flailing or stagnant, yet could be reinvigorated with the right assistance. The terms are finite, and most of them have terms of seven to ten years.
In return for their investment, the investors get an ownership stake, or equity in the company. Limited partners invest in the company and when the company is once again viable, the investors are happy to sell it and limited partners get a return on their money.
Average investors cannot invest in private equity. Most private equity firms require a minimum investment of $25 million although some private equity firms allow investors to invest smaller amounts as low as $250,000.
Nonetheless, less wealthy investors can indirectly invest in private equity via products such as publicly-traded private equity stocks, EFTs, and fund of funds that invest in private equity. This is possible because private equity investors don’t have to meet the SEC threshold for an accredited investor.
Private equity investors target startups and other companies that are on their way up. Because such companies have a strong potential for high growth, their returns are typically higher than investing in stocks.
Private equity investing pays returns via distributions rather than by purchasing stock. Unlike public investments which are subject to heavy regulations, private equity investors can get their returns faster and with less hassle.
On the other hand, public investors have the advantage of liquidity. They can easily trade their shares through public market exchanges which is a disadvantage of private equity returns.
|Public Equity||Private Equity|
|Invests in public stock||Invests in publicly-traded equity stocks, |
EFTs, and fund of funds
|Returns typically lower||Returns typically higher|
|Requires a large investment||Requires smaller investment|
As noted earlier, the private equity market is an alternate investment class that acquires private companies or invests in them. When the value of a private company reaches one billion dollars, the owners have an opportunity to enter the public market as an initial public offering (IPO). At that point, the private equity investors exit.
At the point of IPO, investment banks market the company and price the shares for sale on public exchanges. As new IPOs emerge, public investors make decisions about which companies they want to invest in. Investors can trade or sell their shares at any time if they’re not performing well, or they can hold onto the ones that are performing well.
By contrast, private equity strategies focus on a company’s growth stage rather than a company’s performance, and we’ll describe the main private equity strategies next.
With the end goal of helping a company increase its profits and sell shares for a gain, investors in the private equity market offer marketing and industry expertise to help companies be successful.
Depending on a company’s growth stage, one of three private equity strategies may be appropriate – venture capital, growth equity, or a buyout.
Venture capital investing is a private equity strategy for startups and companies that are still in the early stages of growth. Investors (venture capitalists) give a company seed funding in exchange for a share of the company. Startups like venture capital because investors don’t require them to sell more than 50% of their shares.
A growth equity strategy is appropriate for established companies that need more funding to grow. Like venture capital, investors get a share in the company in exchange for funding. Unlike venture capital, a growth equity strategy gives investors a chance to track a company’s finances and try its products over time to make sure their investments are worthwhile. Companies must come up with a growth plan to justify how growth equity will help them grow and expand.
Buyout strategies are appropriate for mature companies – often companies that went from public back to private. With a buyout, the company’s previous investors cash in their shares. A private equity firm or management team then purchases the company and has a majority share in the company.
A brief look at the private equity market in 2022 gives us a snapshot of how successful private equity strategies are.
After a hot season in 2021, the private equity market started to slow in 2022. Bloomberg reports that mergers and acquisitions for private equity deals dropped by approximately a third year-over-year. Nonetheless, the availability of private credit means that private equity firms have remained active.
Investors largely describe the private equity market as resilient, and they attribute that to strong distribution activity. EY reports that 2022 ranks second as the most active year considering the last decade. The value of private equity transactions was slightly under $730 billion in U.S. dollars.
By definition, global private equity encompasses the total market value of investments an individual or investment firm manages for their clients.
The global private equity market is currently trending well. According to PwC, AUM could nearly double by 2025. PwC predicts AUM could reach $145.4 trillion in U.S. dollars by 2025.
Another important trend that’s emerging in the global markets is environmental, social, and governance (ESG) which is currently a hot issue with investors. According to PwC, today’s investors are especially attracted to companies with a net zero focus on emissions.
These statistics are a natural segue into the market size, so we’ll highlight that topic next.
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Financial analysts research the current and future size of the private and global markets. This information is helpful for identifying trends and forecasting market conditions.
The sizes of the global private equity market and private equity market are trending upward, and the overall outlook is good on both accounts.
PwC projects private market investing will expand anywhere between $4.2 trillion USD and $5.5 trillion USD from 2021-2025. The total figure could reach $13.7 trillion USD and possibly even higher.
McKinsey reports the total AUM was $11.7 trillion USD as of June 2022. This is down from $49.3 trillion USD at the close of 2021.
Deloitte reports global AUM has grown for the third year in a row, and it set an all-time high of over $123 trillion USD at the end of 2021. Preqin forecasts global private capital will double to $18.3 trillion USD by the year 2027, and PwC suggests that private markets could make up over 10% of the global AUM by 2025.
While it’s too soon to assess the private equity size for 2023, we can take some clues from BlackRock’s 2022 Private Markets Outlook. The report shows that 2021 was a record-breaking year in the private equity market. The size of the private equity market tripled from $2 trillion USD to $6 trillion USD.
The increase in the private equity market size is just one of the prevalent trends in the industry.
Private market trends move from one quarter into the next, yet they can change suddenly based on economic and societal factors. For example, investors were concerned about having enough liquidity to support companies through the pandemic. Also, while inflation was already an issue, the war in Ukraine drove it up even higher. As a result, investors have been rightly concerned about rising finance costs.
The first quarter of 2023 was down due to increases in interest rates, inflation, and lack of movement in the stock market, according to EY. As a result, many companies are holding off on IPO until they can assess the outlook for 2023. In the meantime, they need to rely on private funding.
Companies that have their sights set on IPO may need to slow growth because of the lack of capital or find a valuation level they’re comfortable with that also matches investor demand. The strategy could prove to be an advantage as it could help companies grow their businesses larger in the early stages before going public.
According to a news release by Preqin, demand for private capital is showing resilience. Preqin’s research also shows that venture capital is the fastest-growing asset class.
Companies that are aiming for an IPO must go through six stages of funding. We’ll provide some examples of private companies that raised significant capital on their journey to IPO.
The following companies may be on the horizon for IPO in 2023 or relatively soon:
Once private companies can raise enough capital, they can enter the public markets and start trading shares on public exchanges.
In simple terms, the public market is an exchange where investors can trade securities. Private companies must conduct an initial public offering before they can become public entities. Once a company goes public, it must abide by all rules and regulations of the Securities and Exchange Commission (SEC) which governs investments.
Public markets offer mainstream investments such as stocks, mutual funds, EFTs, and bonds on public exchanges. Private markets differ from public markets because investors buy and trade investments privately.
Today, the following companies are well-known and successful. Before they became household words, these companies worked hard to secure private financing.
The size of private markets is much smaller than public markets. An article by WealthBreifing states that the private market capital represents around 49.8 trillion USD, and the public market has more than twelve times that at around $125 trillion USD in capital.
A strategy that private equity firms use to create value for investors is a private equity platform investment, and we’ll explain how that works next.
Private equity companies use platforms and add-ons as a strategy to increase returns and create greater value for investors. This is commonly called a “buy and build” strategy, which is an effective strategy, especially during slower periods.
A private equity firm that acquires a company in a specific industry and uses it as a starting point for acquiring similar types of companies is called a platform investment. The firm can then leverage the investment to add on other small companies which will increase the value of the platform company.
Private equity companies view platform investments as a starting point where they can add on other investments in the future. Companies that are in high-growth industries demand a significant share of the market. For example, CBD product manufacturing, solar power industries, and 3D printing are fast-growing industries that make for good platform investments.
Linqto is a modern private equity company that leverages technology to simplify and streamline the investing process. It is a private equity platform where accredited investors can find and invest in leading unicorns and private companies around the world.
Investing has traditionally been expensive, time-consuming, and limited. Generally, only 2% of accredited investors could access private markets.
Leverage the power of private equities. Make your move and accelerate your wealth creation journey today!
Linqto’s platform makes the private securities asset class accessible and reduces costs. Using the Linqto mobile app or website, investors can place an order in the form of a pick-and-choose selection in as little as a minute. There’s no waiting for an IP or trade sale, and private companies can stay private longer by providing liquidity to employees continually.
Overall, the concept behind Linqto is to make private investing simple, and it does just that for private investors.
Investor is a broad term that refers to any person or group that lends their money to someone or something with the goal of making a profit. We can more narrowly define the word investor by defining private investors, and further defining it by highlighting the types of private investors.
Private investors allocate funds and put them into companies that seek capital to help them grow and succeed. Private investors have the knowledge and expertise to help private companies reach their revenue goals, and when they do, private investors get a return on their money.
Different types of investors focus on companies at certain growth stages.
There are two types of private investors – venture capitalists and angel investors. Also, among angel investors, there are affiliated and non-affiliated investors.
Venture capitalists focus on the early stages of private companies. They may also invest in startup businesses or potential businesses in the idea phase. Venture capitalists take on big risks as the companies they invest in don’t yet have a proven track record, yet the right investment can yield a huge profit when the business enters the public market.
Angel investors help to finance small businesses in exchange for equity in the company. As wealthy or high-net-worth individuals, angel investors share their knowledge and expertise with companies to assist them through the growth stages.
As the name suggests, an affiliated investor is a wealthy friend or family member who is also interested in a particular business. Business owners may also seek non-affiliated investors through professional financial contacts or networks.
Private investors make an investment for a certain period of time which is generally less than ten years. Private investors receive dividends much as shareholders in public companies do.
Where do private companies get the money to pay dividends? Private companies raise debt to pay shareholders’ dividends and this process is called dividend recapitalization. Private investors may also charge a professional management fee for their services.
Private market investing is different from public market investing in that it allows accredited investors the chance to invest in private companies before they go public. Private investing carries higher risks than public investing, yet investors have the potential for higher returns.
Private investing also benefits startups and young companies because it gives them funding to facilitate growth as well as opportunities to have mentoring by successful investors who want them to succeed.
The right technology streamlines the process of private investing making it easier for investors to choose private markets that are the right fit for them and private companies.