Mark Lyttleton is an angel investor, speaker and business mentor who invests in both public and private companies. This article will look at public and private markets, exploring how they differ from each other.
It is crucial for anyone considering investing in private markets to learn what private capital is, identifying its rewards and risks and how it differs from investing in public markets.
In public markets, companies sell stock to the general public, who purchase, sell and trade shares via a stock exchange. Stocks and bonds are common examples of traditional asset classes and are considered to be mainstream investments. Generally larger and more mature organisations, public companies are heavily regulated by government organisations that require them to disclose certain information about their financials, revenue and more.
Private markets consist of alternative asset classes such as private equity, venture capital, hedge funds and real estate. In the private markets, fast-growing private companies that are not listed on a stock exchange can offer professional investors equity in their business to fund their growth.
Since private companies do not answer to public shareholders, they are usually less heavily regulated. They are not required to widely disclose financial statements for auditing or submit earnings reports, making it challenging for outsiders to access reliable, accurate information about them.
Private capital provides investors with an opportunity to pursue greater diversification and longer-term returns than are available through public securities alone. Investors in private capital can diversify their interests according to industry, investment strategy, manager, geographic location and stage of development.
By investing in private companies, investors hope to see an increase in the company’s value, selling their stake at a later stage through a buyout, trade sale or recapitalisation – or through an initial public offering. Private debt funds invest in private companies that are either neglected by banks or seek more flexible financing terms.
Three key features of a private capital investment distinguish it from a public market investment:
- Due to their liquidity, private capital investments tend to have a much longer investment period than public securities. A manager holds a private capital investment for anywhere up to ten years, building value over time before exiting the investment – making market-timing virtually impossible in private markets.
- In comparison with public markets, private capital markets are illiquid and inefficient, a characteristic that provides astute managers with an opportunity to access information about private companies that is not readily available to the public. By contrast, most public market investors benefit from equal access to such information due to disclosure regulations governing the use and release of material information by listed companies.
- Perhaps the most important distinction is that private capital investment managers are more than just financial investors. They typically play an active role in managing their portfolios, helping to develop companies and their business strategies and adding significant value throughout the investment period. This relationship is typically strengthened by the private capital manager’s personal stake in portfolio companies. As they invest their own capital in the funds they raise, they are directly impacted and concerned with the actions and plans they create and implement.
In deciding whether private markets are an appropriate option, investors must consider a variety of factors. Most importantly, as a long-term investment potentially requiring a six to ten year investment horizon, private markets carry a related illiquidity risk.
Private equity is a complex class of asset that requires careful consideration. Private investment calls for a structured approach and diversified allocation throughout the lifecycle of the investment.