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Why Investors Seeking Growth Must Look Beyond Public Equities

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What You Need to Know

  • Private markets increasingly are becoming accessible to advisors and their clients.
  • Over the last three years, private equity generated a 33% premium over public equities as of Sept. 30, 2020.
  • There is a regulatory push to give Main St. investors access to private markets.

As long-term investors search for their next big growth opportunities, one thing seems certain: They will have to look beyond public equities to find them. Increasingly, companies are delaying going public, with much of their growth — and returns — occurring in private markets.

The upshot? Private markets increasingly are becoming accessible to advisors and their clients.

There is good reason for advisors to consider them. Over the last three years, private equity generated a 33% premium over public equities as of Sept. 30, 2020, according to Hamilton Lane. Looking farther back, private equity and private credit have each outperformed global public equity and credit markets respectively 19 of the last 20 vintage years.

Those return trends could continue, as a confluence of factors encourage firms to stay private longer, experiencing much of their nascent, explosive growth before an IPO. The first factor is control. Staying private always has given executives more direction over their business and strategy. It also shields the company from the volatility that is a natural byproduct of being publicly traded.

The regulatory environment offers another cautionary flag for going public. Regulations are becoming increasingly burdensome and costly and companies might want to consider delaying those headaches as long as possible.

And plenty of capital has given companies time to wait. As of late 2019, private equity companies managed $3.4 trillion in investor commitments, up more than six-fold from 2000, according to a 2019 Kenan Institute report.

Each of these factors plays a role in keeping companies private longer. We see this in the technology space, where the age, on average, of a new public company has gone from 4.5 years in 1999 to more than 12 years old, according to a Skadden 2020 study.

As more tangible examples, Uber and Airbnb, two of the 10 largest-ever tech IPOs, waited 10 and 12 years, respectively, before going public, long after they had disrupted the industries in which they operate.

Growing Opportunity Set

Considering the size and scope of private markets, it’s striking how much public equity investors may have been missing. There are roughly 20,000 private companies with annual revenues of more than $100 million, compared to just 3,000 public companies, according to Capital IQ.

For almost two decades, the number of publicly listed companies has been in steady decline. While IPOs increased in 2020 as some companies sought to take advantage of buoyant investor sentiment, the number of companies listed on major U.S. exchanges has still shrunk from more than 7,500 at the beginning of 2000, to less than 5,000 at the end of 2020, according to a University of Florida study.

For decades, access to private companies has been largely limited to institutional and ultra-high-net-worth investors. That is quickly changing. Sensing that Main Street is being left behind from the growing private market, there has actually been a regulatory push to give them access.

The industry has responded in kind. In the past few months, several new registered private equity funds have launched, catering to advisors and their clients.

More are on the way. Individual fund details vary, but these strategies, often referred to as “evergreen” funds, solve some of the challenges around liquidity, large capital commitments and timing delays in funding requirements that have traditionally been barriers for wealthy investors.

From the lens of a high net worth investor, these funds are attractive in that they offer a single-access solution to gain diversified exposure to the private markets. What’s more, the minimum investment size may be as low as $50,000 in some cases.

This means it should be possible for individual investors to not only access the private markets, but be able to do so while building fully diversified private portfolios alongside some of the largest institutional investors.

Advisors and their clients would do well to give these strategies a look.

Josh Vail, CAIA, is president of 361 Capital.

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(Image: Tomertu/Stock.adobe.com)

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