Private markets were once the reserve of sophisticated and institutional investors but have experienced significant growth in recent years. Now, a far broader range of private market investments are available to clients. Through our bespoke portfolios, or via our new digital platform with Moonfare, we typically advise clients to invest between 10-20% of one’s investible wealth into private markets. In this article, we cover three key reasons why we believe investors should consider incorporating private market investments into their portfolios.
Private market investments are often not as frequently tradeable as public market investments like stocks or bonds. While some see the illiquid nature of private market as a constraint, history shows that the longer-term nature of the investments can offer the potential for reduced volatility and increased returns. This is known as the “illiquidity premium”. This premium compensates investors for the reduced liquidity compared to public markets, often leading to better returns for those who can afford to invest a portion of their capital for longer periods.
Source: In-house Research, Bloomberg. Past performance is not a reliable indicator of future performance.
Source: In-house research, Bloomberg. Past performance is not a reliable indicator of future performance.
Traditionally, investors consider stocks and bonds as the foundational elements of a diversified portfolio. By investing in both, investors aim to balance the growth potential coming from publicly listed stocks with the yield and stability provided by bonds. This strategy works well in periods when stocks and bonds are not highly correlated – in other words, when one decreases in value, the other increases, balancing each other out. However, the correlation between stocks and bonds has increased in recent years as shown in the chart below. This means that both can decrease in value during periods of high market volatility.
Private markets, on the other hand, tend to have lower correlations with publicly listed markets. This means that when bonds and equities are decreasing in value, it doesn’t tend to mean private markets are also decreasing in value. Private markets can therefore help to protect long term value in portfolios in tougher times and enhance risk-adjusted returns in the long run.
Almost 90% of large companies with over $100 million in revenue companies are not available to invest through public markets. Therefore, private markets offer access to innovative and emerging companies and sectors not yet available in public markets. This access allows investors to be part of new trends and technologies, providing a unique opportunity to benefit from higher growth and emerging trends.
Furthermore, the publicly investable market universe is shrinking rapidly. In the United States, the number of listed companies dropped from about 8,000 in the late 1990s to around 4,000 by 2020. This isn’t a uniquely US trend: we have seen similar declines in Europe and other regions around the world.
Source: Capital IQ, February 2021 - February 2022.
We believe private markets are a worthwhile part of an investor’s portfolio. They offer opportunities to enhance returns and diversification. However, investing in private markets comes with risks that aren’t as prominent in public markets. There is a comparative lack of liquidity and transparency, more regulatory and operational considerations, and the requirement for expert due diligence. Therefore, having a trusted advisor to help decide if private markets are the right choice for you is important.
One way we can help is by addressing one of the key potential drawbacks of private markets - the liquidity constraints. Through portfolio simulations, we help investors understand the impact illiquidity can have on their annual spending requirements. This gives investors a clearer picture of how much they could allocate to private markets, without it having a negative effect on the amount of money they typically need access to.
If you are interested in learning more about our private markets offering, our digital private markets platform, or to find out whether investing in private markets is right for you, please contact us.
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Information correct as of 29 July 2024.
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