As long-term investors search for their next big growth opportu- nities, one thing seems certain:They will have to look beyond publicequities to find them. Increasingly, companies are delaying going public, withmuch 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 toconsider them. Over the last three years,private equity generated a 33% premiumover public equities as of Sept. 30, 2020,according to Hamilton Lane. Lookingfarther back, private equity and privatecredit have each outperformed globalpublic equity and credit markets respectively 19 of the last 20 vintage years.
Those return trends could continue,as a confluence of factors encouragefirms to stay private longer, experiencing much of their nascent, explosivegrowth before an IPO. The first factor iscontrol. Staying private always has givenexecutives more direction over theirbusiness and strategy. It also shields thecompany from the volatility that is a natural byproduct of being publicly traded.
The regulatory environment offersanother cautionary flag for going public.Regulations are becoming increasinglyburdensome and costly and companiesmight want to consider delaying thoseheadaches as long as possible.
And plenty of capital has given companies time to wait. As of late 2019,private equity companies managed $3.4trillion in investor commitments, upmore than six-fold from 2000, accordingto a 2019 Kenan Institute report.
Each of these factors plays a role inkeeping companies private longer. Wesee this in the technology space, wherethe age, on average, of a new public company has gone from 4. 5 years in 1999 tomore than 12 years old, according to aSkadden 2020 study.
As more tangible examples, Uber andAirbnb, two of the 10 largest-ever techIPOs, waited 10 and 12 years, respectively, before going public, long after theyhad disrupted the industries in whichthey operate.
GROWING OPPORTUNITY SET
Considering the size and scope of private markets, it’s striking how muchpublic equity investors may have beenmissing. There are roughly 20,000 private companies with annual revenuesof more than $100 million, compared tojust 3,000 public companies, accordingto 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 sen-
timent, 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 toinstitutional and ultra-high-net-worthinvestors. That is quickly changing.Sensing that Main Street is being leftbehind from the growing private market, there has actually been a regulatorypush to give them access.
The industry has responded in kind.In the past few months, several newregistered private equity funds havelaunched, catering to advisors and theirclients. More are on the way. Individualfund details vary, but these strategies,often referred to as “evergreen” funds,solve some of the challenges aroundliquidity, large capital commitments andtiming delays in funding requirementsthat have traditionally been barriers forwealthy investors.
From the lens of a high net worthinvestor, these funds are attractive inthat they offer a single-access solutionto 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 forindividual investors to not only accessthe private markets, but be able to do sowhile building fully diversified privateportfolios alongside some of the largestinstitutional investors.
Advisors and their clients would dowell to give these strategies a look.
Josh Vail, CAIA, is president, 361 Capital.
ALTERNATIVE INVESTMENTS
By Josh Vail
Why Investors Seeking Growth Must Look
Beyond Public Equities
Private markets are opening to individuals and can offer them greater returns.
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