Some may debate both the returns and concentration risk claims, but the shift in markets has clearly altered the timing and beneficiaries of corporate growth as well as the means advisors use to access these companies on behalf of their clients.
While the growth of investments in non-public companies has increased dramatically in the corporate sector, explosive growth of private funding is occurring across multiple investment categories including real estate, private debt, oil and gas, infrastructure and more. It also appears that many of the more attractive investments are funded via less regulated and often less expensive private investments rather than through public markets.
Still, for most advisors, the choice should not be limited to choosing between public and private markets as investment vehicles for their clients, but increasingly, how to best leverage the strengths of each market while minimizing its weaknesses.
As all money managers know, public companies are generally completely liquid, offering the ease of quickly and cheaply buying or selling shares at a known price. Regulation mandates tremendous disclosure and board governance rules give shareholders tremendous rights and privileges. Yet, the market’s high liquidity also results in greater volatility and potentially significant mispricing of assets resulting from market dynamics rather than company fundamentals.
Private markets face very different forces, as their width and breadth offer advisors significant opportunity to diversify their clients’ portfolios. There are often substantially lower costs for a given dollar of earning in private markets because of the lack of liquidity. As the universe of direct investments expands, there are also fewer access challenges, partly because of newer investment structures such as interval funds and event standard mutual funds. The lack of daily pricing also results in less volatile pricing than experienced in public companies.
Yet, illiquid private investments can rarely be easily or quickly converted to cash, and while a direct or private holding may not price daily, the value is not truly static. It is simply not updated as regularly. In addition, for many advisors, the income or net worth requirements of their clients limit opportunities to access private holdings.
Still, for most advisors, private markets are likely a source of increasing interest and should probably be considered for a larger role in their client’s portfolios. Public markets certainly continue to offer many great opportunities, but increasingly, these opportunities are shrinking while the private investment world rapidly expands. The ongoing evolution of both public and private markets will likely reward advisors who understand these paradigm shifts in thinking and can adapt and leverage the changes, rather than those who remain locked into past and possibly outdated investment strategies.
Daniel Wildermuth possesses an extensive career in managing diverse asset classes for individuals and institutions, and serves as the chief executive officer and chief investment officer for Wildermuth Advisory, LLC a SEC–registered investment advisor.