For the longest time, the dream was to own a slice of corporate giants like Apple, Google or Netflix. But the financial landscape is now changing. Companies that once rushed to go public are choosing to stay private for longer: Since 1996, the number of publicly listed companies in the US has dropped by more than 50%.
This trend has continued into 2023 amid volatility in the equity markets. In a surprising twist, Bloomberg Intelligence found that the number of public companies that went private outpaced IPOs by US companies this year. The total value of take-private deals came up to US$113 billion ($154.36 billion), in stark contrast to the US$9.3 billion raised through traditional IPOs.
What does this mean for you as a high-net-worth investor? As private markets grow, there’s significant value to be captured by diversifying beyond publicly listed assets – if you make the right investment moves.
The role of private equity and venture capital in your portfolio
For high-net-worth individuals with larger capital, private equity (PE) and venture capital (VC) can provide valuable diversification to an investment portfolio. On average, PE outperformed public equities by 4.4 percentage points per year, with the outperformance increasing to 6.6 percentage points during the bear market periods of 2002-2003 and 2008-2009.
There are a couple of reasons behind this phenomenon. For starters, PE and VC investments have longer holding periods, which prevents panic-selling during downturns. PE fund managers typically invest the capital over the first five years, while exit opportunities usually happen four to seven years after the initial investment.
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PE-backed companies also have significant financial buffers to weather difficult times. Case in point, cash reserves (or “dry powder”) in the PE market soared to a record US$2.49 trillion this year. Thanks to this dry powder, PE-backed companies are able to bounce back from crises faster, gain market share, or even take advantage of lower valuations to acquire new companies.
How to build a diversified portfolio of PE and VC funds
While the argument for private market investing is clear, we have to acknowledge its risks too. Compared to investing in the stock market, PE and VC funds are illiquid. VC funds, which invest in early-stage companies, can also be riskier than investing in the S&P 500. These need to be key considerations during allocation decisions.
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Just like in public markets, diversification is the only free lunch in private market investing. The best global institutional investors, for instance, build commitments to funds across different strategies (such as secondaries, buyouts, or growth equity) and various geographical regions.
However, PE and VC funds often have high capital requirements that can range from US$250,000 to US$1 million per fund, making diversification challenging. The result? Most individual investors are either underallocated to private markets or have very concentrated exposure in just one to two funds.
And it’s not just about the high minimums. With PE and VC funds, investors commit to investing a certain amount of capital but don’t pay the money out in one go. Instead, they are periodically called on to fulfil their investment commitment, in a process commonly known as “capital calls” or “drawdowns”. Once a capital call is issued, investors would have a narrow window of around 10 to 20 days to provide the funds. It’s a process that’s often tedious and time-consuming – just imagine the number of capital calls demanding your attention if you’re truly diversified in 20 different funds!
Still, there are now alternative ways to access private markets, such as through fractionalised investing with fintech players. Personally, I’ve finally started building my exposure to private markets systematically through Stashaway's reserve programme, which allows you to build a diversified portfolio of five to seven funds from as low as US$50,000.
So, is it a good time to invest in private markets now?
As Warren Buffett once famously advised, be fearful when others are greedy and be greedy when others are fearful. Market downturns offer opportunities to invest at more favourable valuations. As the valuations of companies come down, investors can now enter private markets at more favourable prices and potentially capture greater growth.
That said, we know that timing the market perfectly in public markets is nearly impossible. And with private markets, longer holding periods mean that timing your entry is a lot more like trying to grasp onto smoke.
Rather than agonising over the perfect timing, my top tip for investors is to continue following the time-tested principle of diversification. By building a well-balanced portfolio that’s tailored to your time horizon and risk appetite, you have a much better chance of reaching your financial goals – while sleeping soundly at night.
Michele Ferrario is the co-founder and CEO of Stashaway
