Private markets. Sounds like a secret club. And in many ways, it is—but today we are going to lift the veil of secrecy and let light in upon the mystery. To help break down this complex topic, we have Senior Portfolio Manager Jordan Strauss and Senior Research Analyst Julian Freeman.
Let’s first lay out the basics. Julian, what exactly is meant by private markets investing—and how does it differ from public markets?
Private markets (PM) fits within the alternatives asset class. It’s outside of the traditional stock and bond world, where information is often readily available. Here, investing generally involves providing equity (buying an ownership interest) or debt (loaning money) to companies that aren’t traded on public exchanges. To gain access to this exclusive space, investors generally participate in a PM investment fund. PM funds are typically structured as drawdown funds, where a limited partner (the investor) will make binding commitments of capital that the general partner (the fund manager or GP) will call down as investments over what’s referred to as the fund’s commitment period, ordinarily around four years. Following the commitment period, GPs focus on growth and value creation of the portfolio companies they own. As GPs exit investments, they return capital to limited partners.
A key distinction between public and private markets is that the latter offers access to far more opportunities. There are about 4,000 publicly listed stocks traded on U.S. exchanges (a number that has been declining), but there are hundreds of thousands of private companies in the U.S. With such breadth of opportunity, PM fund managers often deploy focused strategies, targeting companies that would benefit from their specialized knowledge and core competencies. Ultimately, investing in PM can offer the opportunity for higher returns and/or increased portfolio level diversification. These are often the factors that drive investors to consider PM investing.
Private funds are available only to certain investors who meet the specific income, experience, and investable assets thresholds set forth by the U.S. Securities and Exchange Commission’s definition of “accredited investors” and/or “qualified purchasers” as necessary.
These types of investments may use aggressive investment strategies, which are riskier than those used by typical mutual funds and you may lose more money than if you had invested in another fund that did not invest as aggressively.
Investments that focus on alternative assets are subject to increased risk and loss of principal and are not suitable for all investors.
Please see additional important disclosures at the end of the article.