What Are Private Markets?
The private market refers, loosely, to investments that are not traded on public exchanges. These investments include private equity, private credit, venture capital, real estate, infrastructure, and more.
Providing capital for a family member’s new venture in exchange for a 3% stake might be considered a private equity investment, for instance. Broader private markets refer to similar ventures at scale. Since private investments occur in private, as the name implies, there’s inherently less transparency and oversight involved with this type of investing. As such, it may carry more risk.
Within the world of private investing there are two broad categories to consider: private equity and private credit. In essence, these are the private equivalents of the stock (or equity) market and bond (fixed income) market.
Private Equity
Private equity investors buy shares of privately-held companies. Often, the goal is to create a big enough stake to influence the direction of the company, enhance its value, and exit the investment through some type of sale, merger, initial public offering, or other capital-generating event. Private equity investors may take board seats or make referrals to portfolio companies to enhance opportunities for success. To afford these shares, private equity firms may raise capital from institutional investors or high net worth individuals.
Venture capital is a specific form of private equity investment. While more traditional private equity companies might look to turn around established companies, venture capital investors buy into newer companies. This type of investing is most commonly associated with tech companies.
Private credit
Investors interested in privately held companies don’t always want an equity stake—they may prefer to lend money. Private credit encompasses various forms of lending provided by non-bank lenders, from private credit funds to direct lending platforms. Private credit investments can include senior secured loans, mezzanine debt, distressed debt, and other structured financing solutions. Private credit tends to be less regulated than bank lending or bonds issued by public entities. As such, they tend to pay higher yields than traditional fixed-income securities to compensate for these higher credit and liquidity risks.
Private markets vs. public markets
Private and public markets have many similarities—a private tech company might respond to the same economic stimulus as a publicly traded company, for instance. The diversification provided by private markets tends to come from how private ventures work. Let’s look at a few of the key differences between public and private markets.
Liquidity. Investors can easily buy and sell securities on public exchanges. In addition to liquidity, public exchanges offer price transparency; you know what your public investments are worth, roughly, at any given time. In contrast, private market investments are illiquid, with longer investment horizons. Accessing your money sooner may carry penalties or impose limitations.
Tax reporting. Depending on how you invest in private markets, the tax statements and reporting requirements may be more complex than with public investments.
Transparency. Public markets not only include price transparency, there’s a certain amount of transparency required from the companies themselves. Public companies must disclose extensive financial and operational information to investors at least once a quarter, and material changes must be disclosed to shareholders in a timely manner. Private companies, on the other hand, are not subject to the same standards. That means you may not know what your investments are worth at any given time.
Access. Virtually anyone can buy securities via public markets. And while anyone can make private investments on a small scale (like investing in a family member’s business), regulators limit access to some private markets. For instance, we mentioned private equity firms tend to raise money from institutional investors or high-net-worth individuals; that is because regulators mandate investors in these types of funds meet certain income and asset requirements.
How to invest in private markets
A financial advisor can help you navigate private markets. For instance, we can only mention investments that you are qualified to make, so you won’t hear about exciting opportunities that you cannot access. Here, we’ll look more generally at the types of “vehicles” you might use to invest in private markets.
Private equity funds and firms. Investors might contribute money to funds whose goal is to invest in privately-held firms. Investors who don’t meet the SEC requirements can still invest in private equity, as a number of private equity firms are publicly traded—Blackstone, KKR, The Carlyle Group, and Bain Capital are a few of the more well known.
Note: We are listing these firms for illustration purposes; this is not intended as an endorsement or recommendation.
Private credit funds. Firms that provide financing to private companies or projects seeking alternative sources of funding often look for investors to contribute to private credit funds. Investors can participate in these funds to earn attractive yields and diversify their fixed-income portfolios. An advisor can help you vet the firms and fund managers that participate in these private credit deals.
Direct investments. You might prefer to invest directly in private companies or projects. While bypassing intermediaries can help boost returns, it can also increase risk unless you’re well versed in what you hope to invest in. One thing to keep in mind: While financial advisors can help you understand how these investments fit into your overall portfolio, they may not be able to make recommendations or discuss their suitability.
Is it worth it to invest in private markets?
Investing in private markets can be both harder and easier than investing in publicly-traded securities. Private investments may carry more risk and the path to profit may be more opaque than with a publicly-traded venture. As such, you this type of investing may require more (or specialized) expertise, and access may be limited. These investments are also slightly more complex.
You might be less aware of the risk and potential reward included in these investments. You may also need to navigate more complex regulations, from disclosures to tax filings. A financial advisor can be instrumental to navigating this complexity.
Quorum Private Wealth specializes in helping clients access private markets when appropriate. If you're interested in exploring private investments, reach out to a Quorum advisor to discuss.
