Edited By Sunita Arnold, Jul 17, 2023
The right securities in private or public markets can be a lucrative investment. When private market investing is a good fit, it’s good for companies, investors, and larger societies.
Public investing is commonly known, yet the PitchBook Private Markets Guide has this to say about the private markets, “If you’re overlooking it, you’re overlooking 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.”
A broad definition of private markets refers to any investments that cannot be traded on a public exchange or the stock market.
Private markets consist of alternative investments such as private equity, private debt, venture capital, and hedge funds. Investors can make private market investments directly, however, they generally invest in funds that are part of a larger portfolio by purchasing an interest in a private equity firm.
Private investors may invest directly or indirectly. Here’s the difference:
Because investing in startups is risky, the federal government only allows ultra-high-net-worth individuals to invest in buying shares in private companies. While the wealth standard for indirect private market investing is lower than public investing, it still requires a significant investment.
A few of the largest private equity firms are publicly traded, although most private equity firms are private companies. Here is a random sampling of 10 private markets:
While the risks in the private markets are greater than in the public market, the rewards have the potential to outweigh the risks.
There are several reasons that make private market investing attractive – diversification, lower volatility, and the potential for higher returns.
A CAIA study shows that private equity allocations by state pensions produced 11% returns over 21 years. These results are significantly higher than the public markets which produced a 6.9% average return for the same timeframe.
Private markets open up market segments that aren’t available in the public markets. By investing in both markets, investors can improve their risk profile and potentially yield higher returns.
Longer-term investments are less volatile than shorter-term investments reducing the ups and downs of the market.
The following four issues may be a hindrance for some private market investors:
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.
Advancements in technology have led to a phenomenon called fintech which is a modern term for financial technology. At its core, fintech automates and improves the delivery of financial services and how individuals use them.
For example, Linqto is a private market investing platform that gives investors opportunities to invest in top mid to late-stage start-ups, often with lower minimum investments. Accredited investors can choose from private companies within various industries and fully complete transactions online or on Linqto’s mobile app.
With Linqto, private equity markets are now accessible and simplified.
What is private equity investing? Limited partners join forces to create investment partnerships. Such partnerships purchase private companies and mentor and manage them. When a company is thriving under the partnership years later, the limited partners sell the company to realize a return on their investment.
Limited partners typically invest in industries where they have the necessary level of knowledge and expertise to help the company become financially strong.
Investible assets that private companies sell to investors are called private equity securities. The purpose of this is to allow private companies to raise capital from a group of accredited investors which will give private companies money to grow.
Securities can be issued at any stage of development. For example, start-ups can use the funds as seed capital and later-stage companies may use them to facilitate growth.
According to Fortune, there are three drivers of performance in public markets which are valuations, capital, and active management. Considering these metrics, private equity markets have always outperformed public markets, even during recessions.
Research by Fortune shows that private market deals during the 2008 global financial crisis generated a 61% internal rate of return as compared with S&P 500’s rate during the same timeframe of -38%.
While private equity investors don’t get a return on their money until the fund exits the investment, the risk historically pays off over the long term.
According to research by the National Bureau of Economic Research, for every dollar invested in private equity, each fund netted a 20% higher return than for every dollar invested in the S&P 500. Buyout funds for private equity performed better than public markets during the 1980s, 1990s, and 2000s.
Generally, private equity investors invest in startups that are ready for IPO. Since these types of companies have high growth potential, their returns generally exceed public company stocks but that’s now always the case.
Over the 20 years spanning 2000 to 2020, annual private equity returns were 10.48% on average, according to the U.S. Private Equity Index by Cambridge Associates. During the same timeframe, the Russell 2000 Index reports returns of 6.69% on average and the S&P 500 Index averaged 5.91%.
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The data on various indices makes it difficult to make exact comparisons between asset classes, although the trends show how various asset classes are likely to perform overall.
The following statistics will give you an idea of how private equity returns compare with venture capital and hedge funds:
Public and private equity investments pay returns differently. Public investors build wealth by accumulating stocks. By contrast, private equity investors get paid through distributions.
Since investors who invest in public stocks can easily trade shares on public exchanges, they have the advantage of liquidity over private equity investment.
Public market investing serves the financial needs of established companies.
The public equity market refers to companies that go from private status to IPO status on public exchanges. Public companies are collectively owned by millions of investors enabling companies to access capital from a wide pool of investors.
The largest companies in the world are listed on public exchanges such as Microsoft, Amazon, and Apple.
Many investors purchase stocks and do little to no trading, preferring to let the stocks grow over time. Other investors actively buy, sell, and trade stocks with the hope of maximizing their investments. Active public market investors monitor their investments well and actively advocate for responsible management.
The two main stock exchanges in the United States are the NASDAQ and the New York Stock Exchange.
Other exchanges in the United States include:
International stock exchanges include:
There are four main benefits of public markets:
While investors enjoy the advantages of public markets, there are some risks as well.
We’ve come up with the following 6 challenges investors should be aware of before making purchases in public markets:
As for point #6, online trading and digital platforms have made trading easier than in the past.
Investing terms can be confusing, and we’ll sort out the confusion by defining capital markets and public markets.
The term capital markets is a broad term that refers to markets that facilitate the flow of capital between businesses that need funding and the investors who lend them funds. Capital markets include debt markets, private markets, and public equity markets. Public markets exclusively refer to companies that have gone through the IPO process.
There are 5 major differences between public and private markets. Here’s the breakdown:
Next, we’ll explain more about the nuances of public equity.
When a private company makes its IPO, its status changes from a private company to a public company. At this point, a public company sells shares in the company to the public and uses funds gained from sales to finance additional growth. This is called public equity.
Public equity securities are a type of financial instrument that holds monetary value. Securities are negotiable and mutually interchangeable.
Public securities are generally sold as shares of stock, and they are regulated by the SEC. Also, public equity may be used in ETFs, mutual funds, IRAs, 401(k)s, or other investment vehicles.
The primary advantages of private equity are low volatility and high returns. These characteristics result in high risk-adjusted returns (ratio of the potential return and the degree of risk).
Data presented by Enterprising Investor shows the following comparison between private equity, S&P 500, and U.S. 10-year bonds:
As shown, the private equity percentage was nearly half of S&P 500’s volatility which is slightly lower than that of the 10-year US government bond.
Linqto revolutionizes private equity by using cutting-edge technology to simplify the investing process. It serves as a dynamic platform where accredited investors can discover and invest in prominent unicorns and private firms globally.
Historically, investing has been costly, time-consuming, and restricted, with private markets only accessible to about 2% of accredited investors. Linqto is challenging this status quo by making the private securities asset class affordable and readily accessible.
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Whether using the Linqto mobile app or website, investors can swiftly make a selection and place an order within just a minute. No need to wait for an IP or trade sale, as Linqto enables private companies to remain private longer by offering continuous liquidity to their employees.
In essence, Linqto’s mission is to simplify private investing, and it does so effectively for private investors.
Investors who are interested in safe investments will have a higher level of comfort with public equity offerings as they are generally less risky.
Public equity investments are also more accessible and easier to find than private equity investing opportunities.
If liquidity is a concern, public equity is the more favorable choice over private equity as investors can trade stocks through public exchanges anytime. Public equity often relates to public investment.
The concept of public investment grew out of the need for governments to build an infrastructure and provide vital goods and services to their communities. Public investment refers to governments investing in certain assets through public or private organizations or nonprofits to provide for the community’s needs and improve residents’ quality of life.
Over time, governments have developed various types of public-private partnerships to ensure efficiency and cost savings.
Governments invest in various areas of the community including:
Each of these industries plays a role in local, national, and global economic growth.
People often make choices about where they want to live and work based on their desired quality of life. The primary roles of public investment in economic growth are to promote productivity, foster social well-being, and help communities thrive. Governments also commonly invest in pension plans as retirement benefits for public servants.
Thirty-eight countries have joined the Organization for Economic Co-Operation and Development (OECD) in the interest of stimulating world trade and economic progress.
OECD reports the following public investment data:
In their own way, public and private markets help to support the economy and communities.
The private and public sectors are not opposing forces, rather they are complementary. Examples will make clear why both are vital to people and the communities they live in.
The following list offers a few examples of private-sector businesses and industries:
The private sector can be a change agent that promotes development in the public sector. Government officials and business owners must have regular discussions for this to occur.
Both sectors make important and sometimes critical contributions to our economy. Together and separately, private and public markets can be a mighty force to help communities achieve their goals and make overall progress.
In the past, the private markets have been predominantly manual and illiquid. With advancements in technology, much of that has changed in ways that have significantly opened up the private 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.