The Smart Investor’s Guide to Private Market Opportunities

If you ask most individual investors what makes up most of their portfolios, you’ll find they are primarily involved in the public markets – traditional stock and bond exchanges. These vehicles offer broad accessibility along with high levels of liquidity, transparency, and regulatory oversight. Nonetheless, the public market does not hold the highest potential for value. The private markets, which include private equity, venture capital, real estate, and private debt, offer higher comparative outcomes for investors. Many investors recognize this potential and seek to diversify their portfolios beyond the traditional 60/40 stock-bond mix to capture opportunities in innovative and growing companies before they go public.

Recent McKinsey reports show that private markets assets under management (AUM) have grown nearly 20% per annum since 2018, reaching $13.1 trillion (USD) in mid-2023.¹ The current market landscape (including interest rates, market volatility, the global economy, and the cool IPO environment) is a significant reason for this shift.² Despite the growth, the amount invested in the private market remains small compared to public market AUM. There are a few reasons why. Private market investments are often illiquid and require longer-term commitments and larger capital outlays from investors. They are regulated but do not offer the full, near real-time transparency that public stocks provide. And fewer individuals qualify to take part in these investment vehicles. However, with the rise of alternative fund structures like Evergreen BDCs, many of those hurdles are going down.

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‍The Private Market is a Crucial Asset Class  

Whether seeking to replace public market investments or diversify their growing portfolios, investors are increasingly moving to a 40/40/20 mix of stocks, bonds, and alternatives. This distribution outperforms the traditional 60/40 stock-bond balance, offering a higher expected return for a given level of risk.  ‍

Benefits of Adding Private Market Investments  ‍

• ‍Potential for Higher Returns:
  ‍Most private market investments offer the potential for higher returns compared to public market investments. The reasons are multi-fold, including the opportunity to invest early in high-growth companies in emerging sectors.   ‍
• Access to Unique Opportunities:
  ‍The private market is deeper than the public market by multitudes. Currently, 2,800 U.S. public companies (26%) have annual revenues exceeding $100M compared to 18,000 private businesses of that size (83%).³ Adding innovative, earlier-stage companies to that opportunity pool means investors have more ways to diversify their portfolio with interesting, promising, and demonstrated companies.
• Portfolio Alignment:
  ‍The depth of the private market gives investors more options for aligning their values with their wealth goals.   ‍
• Long-Term Rewards:
  ‍Private market investments are usually long-term commitments, which is one reason why they have historically been a resource for institutional investors and endowments rather than individuals. For investors willing and able to take a patient capital approach, extended investment horizons allow assets to mature, potentially generating an illiquidity premium – additional returns received for locking up capital and giving managers more time to develop and compound value.  

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How to Invest in the Private Market  

Adding the private market to a portfolio can be a great way to diversify, secure, and accelerate returns, provided that investors take a thoughtful approach and engage expert guidance. The nuances of participating in the private markets can be sophisticated, and these investments come with risks. A trusted, knowledgeable registered investment advisor (RIA) can assist with due diligence, liquidity strategies, and balancing risk and return potential. An established RIA with experience in alternative structures may also have access to top-performing funds that align well with your financial goals. Before you get started, there are a few considerations to address.

1. ‍Confirm Accreditation:  
   ‍Many private market alternatives are accessible to accredited investors and require lower minimums. These requirements can vary by fund. Before investing, confirm that you meet the qualifications. ‍
2. Assess Investment Goals and Risk Tolerance:
   ‍Remember that private market investments often have longer time horizons and can be less liquid than public market stocks. Assess how much illiquidity you can manage and how much risk you are willing to accept in exchange for potentially higher returns.  ‍
3. Consider the Network:  
   ‍Many top-performing private market investments are accessible only through top-tier funds. A well-established RIA will have relationships with private equity, private credit, and venture capital funds that can satisfy your requirements.‍
4. Conduct Thorough Due Diligence:  
   ‍Beyond historical performance, it’s crucial to analyze the management teams, business models, market potential, and financial health of target investments. A good RIA will facilitate this process.  

For investors looking to diversify their portfolios and enhance returns, the private markets offer depth and potential that most public market stocks and bonds can’t match. With the proper planning and expert guidance from an RIA, you can access top-performing assets that align with your wealth preservation and growth objectives.

For more information about integrating private market investments, get in touch or join our team for an upcoming conversation.