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Hewison Private Wealth - Insights
Hewison Insights

The case for investing in private markets.

Travis Schindler
Partner & Wealth Adviser
17 Apr 2023

A significant share of the global economy is in private ownership. Simply put, private market investing refers to investments made in the equity or debt of companies that are not listed on a stock exchange. In other words, these are companies that have not “gone public.”  Rather than list on public exchanges, many private companies, or real estate and infrastructure assets, prefer to seek long-term investment capital from private markets investment funds to realise their growth potential.

Private markets fund managers typically take a majority stake in their investments, which they generally hold for 3-7 years. During the hold period, private markets managers aim to create value by following an active ownership model, aligning interests with management and other stakeholders, providing valuable strategic and operational input, and improving governance structures. The long investment period typically allows companies to better withstand periods of volatility.

The private market continues to grow with companies staying private for longer. Depending on the company’s stage of life, this could be driven by:

  • Regulatory changes that have made it more challenging and administratively burdensome for companies to go public.
  • Growth-oriented companies are often still developing their business models and auditing their product sets, which may result in higher volatility if implemented in the public markets.
  • The amount of private capital available to companies has surged as investors have increased their allocations to alternative asset classes.

The primary difference between the public and private marketplaces is liquidity. Investing in public markets provides easy-to-trade stocks and bonds, meaning an investor can liquidate their position pretty much any time they’d like by selling to another investor. On the other hand, this liquidity also contributes to their volatility.

Investing in private markets affords investors the opportunity to realise a premium for the lack of liquidity they agree to take on. In other words, because private markets tie up an investor’s money for longer periods of time, they can often offer a higher return. Moreover, there exists a much wider variety of investment opportunities in private markets than in public.

Besides the potential for higher returns, an allocation to private markets typically helps to reduce overall portfolio volatility. In private markets, valuations tend to be much more a reflection of a company’s actual earnings and therefore are not as vulnerable to the outside ‘noise’ of investor opinion which can impact public market share prices. In addition to lower portfolio volatility, investors can increase portfolio diversification through an exposure to private markets, as a complimentary allocation to traditional listed shares or bonds.

Before investing in private markets, investors should speak with their Wealth Adviser to familiarise themselves with the risks and unique strategy features of individual private market funds to ensure proper suitability.