The main difference between investing in the public markets vs investing in private markets is the liquidity of the investment. Public market investments are comprised of stocks and bonds and are investments that the everyday investor is typically familiar with. They are publicly traded, available for the general public, and have high volatility and liquidity. Because stock in a listed company is liquid, its shares can be sold at any time by any investor who owns a share. That means that the price of that stock is determined by the actions of all the shareholders. If a large number of shareholders decide to sell their holdings, the value of your shares is likely to fall, whether you want them to or not.
On the other hand, private market investing, such as venture capital, is an investment strategy that’s long been used by the 1% (the wealthiest Americans). These investments are available only to accredited investors and qualified clients providing access to new high growth companies with steady growth trends. Perhaps the most common objection to investing in private markets is the perceived burden of illiquidity. However, one reason private markets are believed to outperform the public markets is because of a clear advantage that only comes with less liquid assets. In privately owned companies, a small group of decision-makers have the ability to wait for an optimum time to sell--when the value is high.
When markets are down, investing in private assets may help reduce the highs and lows that occur in portfolios that rely heavily on the stock market. Balancing your portfolio with private market investments provides peace of mind when everyone is running around frantically talking about the dips of the S&P 500.
Private market investments are intended to take a long-term view that allows them to execute multi-year value creation plans and capitalize on longer-term market trends to outperform public markets over an extended time period. A proper evaluation of performance requires patience and an understanding that immediate feedback will not always be available. However, the reporting lag has historically been worth the wait, as private markets have demonstrated the ability to deliver outsized returns with lower levels of volatility than public markets.
PERFORMANCE OF PUBLIC VERSUS PRIVATE EQUITY DURING RECESSIONS
According to iCapital, "During the dot-com bubble, private equity funds (measured by the Cambridge US Private Equity Index), fell by 21% from the first quarter of 2000 through the third quarter of 2002. They then gained 26% over the following five quarters, bringing the index close to its pre-crisis levels by the end of that stretch. Over the same time periods, the S&P 500 Total Return Index fell by 44% before a subsequent 40% gain. It did not return to pre-crisis levels until late in 2006.
During the Global Financial Crisis (GFC), private equity fell by 30% from the third quarter of 2007 through the first quarter of 2009. The index returned to its pre-crisis levels by the end of 2010, delivering a 49% return during that recovery period. During the same time periods, the S&P 500 contracted by 46% before experiencing a 64% gain. However, it took until early 2012 to fully regain its losses from the sell-off.
Over the full cycles, private funds have outperformed public markets. This suggests that private investments can provide investors with both higher returns and lower perceived volatility than their public counterparts during a recession.
We are still in the early stages of the downturn caused by COVID-19, but today’s market appears to be following a similar pattern. Preliminary data gathered by Hamilton Lane suggests that private funds marked their portfolios down by about 10.9% on average in the first quarter of 2020. By comparison, the S&P 500 Index was down by approximately 19.6% for the quarter. While public markets regained a significant portion of those losses during the second quarter rally through mid-June, the rebound has come with high levels of volatility, which we do not expect to see from private investments."
Putting all of your assets into the stock market is a high-risk approach to investing since the market is extremely volatile. You want to ensure you have a diversified portfolio with a mixture of both public and private investments so you can see the benefits when the market performs and also be shielded against market volatility. A well-balanced portfolio offers the best of both worlds and gives you a better chance at realizing long-term returns.
If you are ready and want to take the next step and be a part of this with us, please reach out to me and we can discuss further and answer any questions or concerns that you may have.
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