Edited By Darin Soat, Updated: Dec 6, 2024
Share
Investing in the right securities—whether in private or public markets—can lead to significant financial gains. When private market investing aligns well with your financial goals, it can be beneficial for companies, investors, and even society at large.
Public investing is more widely known, but as the PitchBook Private Markets Guide states, “If you’re overlooking it, you’re missing a major, fast-growing sector of the economy—one that includes millions of companies, from venture-backed startups like Lyft to private equity-backed franchises like Safeway.”
Private markets refer to investments that cannot be traded on a public exchange or stock market. These markets involve alternative investments, such as private equity, private debt, venture capital, and hedge funds. Investors can either invest directly by purchasing shares in private companies or indirectly by buying shares in private equity firms.
Since startup investments can be risky, the government allows only ultra-high-net-worth individuals to directly invest in private companies. While indirect private market investments typically have a lower wealth standard than public market investing, they still require a substantial investment.
Many private equity firms remain private, but a few are publicly traded. Here are some notable examples of private market firms:
While the risks in private markets are generally higher than in public markets, the potential rewards can outweigh those risks.
Investing in private markets offers several key benefits, including:
While private market investing has its benefits, there are also some challenges to consider:
Private equity investing involves limited partners (LPs) coming together to form investment partnerships. These partnerships purchase private companies, help manage them, and guide their growth. Once the company becomes financially stronger, the limited partners can sell it at a profit, realizing a return on their investment.
Typically, private equity investors focus on industries in which they have experience or expertise, enabling them to actively contribute to the company’s success and development.
The most common way to invest in private markets is to buy shares of stock in a private company. Although it’s less common, investors may also buy into the private equity firms that invest in privately-owned companies. A private marketing investing platform makes accessing an array of private companies effortless.
Private equity securities are investable assets that private companies sell to raise capital. These securities allow private companies to access funds from accredited investors, which can then be used for growth or expansion.
Private equity securities can be issued at any stage of a company’s life cycle. For example, early-stage companies can use the funds as seed capital, while more mature companies may use them to scale operations or enter new markets.
Private equity investments have consistently outperformed public markets, even during challenging economic times. According to Fortune, three key factors contribute to this superior performance:
During the 2008 global financial crisis, private market deals generated an internal rate of return (IRR) of 61%, compared to the S&P 500’s return of -38% over the same period. This shows how private equity investments, with their hands-on management approach, can weather economic downturns better than public market investments.
Historically, private equity has delivered strong returns over the long term, even though investors do not see a return on their money until the investment exits. The National Bureau of Economic Research (NBER) found that every dollar invested in private equity yielded a 20% higher return than every dollar invested in the S&P 500.
Additionally, private equity buyout funds have consistently outperformed public markets since the 1980s. Data shows that private equity performed better than public markets throughout the 1980s, 1990s, and 2000s, making it a high-return investment option for long-term investors.
Private Equity vs. Public Equity Returns
Private equity investments often involve companies that are poised for an IPO, which generally have high growth potential. This potential usually results in private equity returns exceeding those of public stocks, though that is not always the case.
From 2000 to 2020, private equity returns averaged 10.48% annually, according to the U.S. Private Equity Index by Cambridge Associates. In comparison, the Russell 2000 Index reported average returns of 6.69%, and the S&P 500 Index averaged 5.91% over the same period.
Private Equity Returns vs. Other Asset Classes
Private equity returns often outperform other asset classes. While comparing various asset classes can be challenging due to differences in risk profiles and market conditions, here’s how private equity stacks up against other investments:
These statistics highlight the superior returns of private equity compared to other asset classes, especially over the long term.
Public equity markets consist of companies that have transitioned from private to public status by listing on stock exchanges through an Initial Public Offering (IPO). Public companies are owned by millions of investors, providing them with access to capital from a broad investor pool. The largest public companies, such as Microsoft, Amazon, and Apple, are listed on exchanges like the NASDAQ and the New York Stock Exchange (NYSE).
Investors in public markets can adopt different strategies. Some prefer long-term investments, buying stocks and allowing them to grow over time, while others actively trade stocks to maximize profits. Active public market investors closely monitor their investments and advocate for responsible management.
The two main stock exchanges in the U.S. are the NASDAQ and the NYSE. There are also several other exchanges, including:
International exchanges include:
There are several benefits to investing in public markets:
Despite these benefits, public market investors also face certain risks.
Here are six challenges that public market investors should consider:
Private equity typically offers the advantage of lower volatility compared to public equity, while also providing the potential for higher returns. These characteristics result in higher risk-adjusted returns, which is the ratio between the potential return and the degree of risk taken on the investment.
Data from Enterprising Investor provides a comparison of volatility between private equity, the S&P 500, and U.S. 10-year bonds:
As you can see, private equity volatility is roughly half that of the S&P 500 and slightly lower than the volatility of U.S. 10-year bonds. This lower volatility makes private equity investments more stable over time compared to public equities, which can experience sharper price swings due to market fluctuations.
Public investment refers to the funds that governments allocate to build infrastructure and provide essential goods and services for their communities. This can be done through public or private organizations, or nonprofits, with the goal of meeting community needs and improving the quality of life for residents.
Over time, governments have developed various public-private partnerships to ensure more efficient use of resources and to save costs.
Governments invest in many sectors that are essential to both local and national economies. These areas include:
Each of these sectors plays a crucial role in fostering economic growth on local, national, and global levels.
Public investment is central to promoting productivity, improving social well-being, and helping communities thrive. Many people choose where to live and work based on the quality of life, which is often influenced by public infrastructure and services.
Additionally, governments frequently invest in pension plans as retirement benefits for public servants. These investments contribute to economic stability and long-term financial security for the population.
Thirty-eight countries have joined the Organization for Economic Co-Operation and Development (OECD) to promote world trade and economic progress. Here’s a snapshot of recent public investment data:
Public and private markets both play essential roles in supporting economies and helping communities achieve growth.
Here are five major differences between private and public markets:
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.
Darin Soat
Darin Soat is Linqto's Head of Community and Education. Prior to joining Linqto, he spent half a decade in investment banking doing mergers and acquisitions in the healthcare and technology industries, most recently in San Francisco for Cain Brothers. While in investment banking, Darin held his FINRA Series 63 & 79 licenses. He is based in Los Angeles.
