A universe of potential opportunity lies beyond the public markets

Technology and trends have made individual investors an important part of the private market.

As a symbol of economic vibrancy and opportunity, it’s hard to beat the public market. Its storied venues, where everything from butter to trillion-dollar tech companies are bought and sold, are a foundation of the modern world.

But consider this: In 2023, there were 2,802 publicly traded companies earning annual revenues over $100 million in the US. These public companies represented just 13% of those making over $100 million, according to Blue Owl Capital. The other 87% – 19,260 companies – were privately held. And like their public brethren, private companies also seek capital to fuel their ideas. When they do, they become part of the private market.   

The private market is similar in many ways to the public market, dealing in the ownership of companies, corporate debt, preferred securities – assets that shares similarities to both stocks and bonds – and real assets, but its landscape of information, complexity, risk and regulation can be quite different. As a result, the potential reward can be quite different too.

Once considered rarefied air in the investing world, shifting tastes and economics have worked hand in hand with marketing innovations to make it easier for individual investors to tap into these powerful currents. And as individual investors have been looking for opportunities outside the mainstream, private companies have concurrently sought the partnership of non-institutional investors.

Why investors turn to the private market

No. 1: Potential for greater returns

One criticism of the public market is that it incentivizes companies to move toward an unremarkable middle ground, punishing CEOs who attempt novel approaches to business problems and valuing short-term growth over long-term goals.

While investors can be a powerful moderating voice in a private company, as well, the elevated risk of investing in private companies tends to self-select for those who trust a company’s leadership or believe in the product.

Today, companies are staying private for longer than in the past – or eschewing a public offering entirely – to stay out of the public chatter and keep closer control of the company’s trajectory. Private market investors expect this clarity of purpose (and greater risk) to produce greater value over time through appreciation, yields or dividends. 

No. 2: Diversification

As participants in a market economy, we’re all captive to the macroeconomic news of the day to some degree. At certain social events, you can utter “2008,” “dot-com bubble” or “Black Monday” and ruin someone’s evening.

Private markets can offer some distance from those trends since trading volumes are lower, the market is less liquid, prices aren’t updated every second and small changes in governance don’t spark hours of commentary on slow news days. While private market investments can be volatile, the total market tends to experience much less of the whipsawing seen in the public markets, where algorithmic trading, technical analysis and fashion can drown out business fundamentals.

No. 3: Intentionality

Tax-advantaged retirement accounts made stocks and bonds a kitchen table topic and the traditional portfolio has enabled millions to retire in comfort. But it can all seem a little abstract – funds made up of ticker symbols representing established companies years after their initial public offerings.

Comparatively, private market investing can feel more intentional and meaningful. Investors may feel a closer attachment to the companies they co-own or lend money to, helping give it the lift it needs. Also, who wouldn’t want to be an early investor in a company that is very successful?

Relationship to alternative investments

Alternative investments and private markets are often spoken of in the same breath, and for good reason.

Private market investing is considered alternative investing, but not all alternative investing is private market investing. Some alternative investments use publicly traded stocks and bonds in non-typical ways, such as by locking in investors for a period of time.

Risk factors

Information

At any given moment, you can turn to finance news and get timely information about a major public company, its earnings, operations, palace intrigues and stock performance. Some of this openness is demanded by government regulation, but the news hounds in the financial press do their part, too. This smorgasbord of information promotes fairness and good governance. Alternatively, there is less coverage of private companies and thinner regulations, so problems may fester for longer in the dark. 

Liquidity

Even with the ongoing democratization of private market investing, there is a smaller population of investors to buy what you’re offering.

Size

Many private companies are small. Small companies are less resilient to setbacks, like the failure of a key product line or a change in macroeconomic conditions.

Fees

Investment fees tend to be higher for private market investing, reflecting complexity, deal sourcing, management skill, demand and the higher cost of performing due diligence. 

Getting started

Unless you are already enmeshed in the world of private markets, you’ll likely need the services of a professional to find and present offerings suitable to your goals – your financial advisor. As a private market investor, you can invest directly in a company selling shares or issuing debt, or you can invest in funds. Private equity funds, for example, may own a portfolio of private company equity and debt or own and manage private companies outright.

While private market investing is less regulated, it’s not the Wild West, so financial advisors and their partner broker/dealers will vet offerings as part of their due diligence practices.

And as with other alternative investing, there can be barriers to entry. Investors may need to be “accredited investors,” “qualified clients” or “qualified purchasers,” meaning they meet certain net worth minimums or other requirements. These regulatory guardrails are meant to prevent inexperienced investors from engaging in higher risk investing they don’t understand. Brokerages may set additional qualifications, to limit their liabilities.

That said, private market investments have been democratizing, structured in such a way to allow lower minimum investments, lower investor qualifications and simpler tax reporting. As a result, private market assets are now found in even some otherwise very traditional portfolios.

This article is for informational purposes only and is not a recommendation. Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. You should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. You should only invest in alternative investments if you do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Asset allocation and diversification do not guarantee a profit nor protect against loss. Dividends are not guaranteed and will fluctuate. Investors should consult their financial advisor prior to making an investment decision.