Ensuring Your Portfolios Benefit From Private Markets – ValueWalk Premium

Ensuring Your Portfolios Benefit From Private Markets

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Private Markets

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The recent initial public offering of ride-sharing tech unicorn Uber on the New York Stock Exchange illustrates what is a harsh reality to digest. A unicorn – defined as a private company startup valued at over $1 billion – can be unexpectedly disappointing to public market investors.

Software and technology companies are transforming the world, and many of these revolutionary enterprises are being backed in their earliest stages by private equity (PE) firms who can, in theory, reap huge returns when the company goes public – that is, if it goes public.

On that note, investors often lose sight of the fact that many successful private companies stay private, foregoing the public markets altogether. In fact, according to data provider NAICS, 98% of businesses with $10 million or more in sales are private companies. There has recently been a profound shift in the economy, resulting in productivity and economic growth flowing not from equipment or buildings, but from software, according to the WSJ. To catch this investment wave, many investors are increasingly looking to the private markets – specifically, PE investments.

PE has become an established asset class. According to a 2019 McKinsey & Company study, PE’s net asset value has grown more than sevenfold since 2002, twice as fast as global public equities. The study reveals that U.S. PE-backed companies, totaling about 4,000 in 2006, have almost doubled by 2017. Meanwhile, U.S. publicly traded firms fell by 16% from 5,100 to 4,300 (and by 46% since 1996). As noted in the McKinsey study, even some large investors that had previously stayed away are now allocating to private markets, seeing them as inevitably necessary to gain diversified exposure to global growth.

There is a prevailing misconception that high-quality PE funds are hard to access, but that is changing, and an increasing number of independent financial advisors are turning to alternative investment platforms to gain exposure to PE funds for their qualified clients’ portfolios.

In addition to providing access to high-performing growth companies, PE also offers other potential advantages for investors. The first is performance. While there’s never a guarantee, many PE performance benchmarks beat the S&P 500 and Russell 3000 over the last one-, three-, five- and 10-year periods.

Next, since PE-backed companies operate out of the eye of the public markets and are absolved of the necessity to report quarterly results, they are substantially unaffected from the volatility of public markets and liberated to pursue unique long-term growth strategies.

Finally, the management of many PE firms are subject-matter experts in the sectors in which they invest. Many firms have – by design – dedicated specialist teams or networks that contribute strategic and operational expertise to the companies they back.

Read the full article here by Steven Brod, Advisor Perspectives


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