Private Market Investments

The What, Why, Who, How, and When to Use Them

The world of finance has changed over the past few years, which has led to an increasing number of articles written in the press regarding private market investments. Sometimes it’s not easy to figure out what these investments are, so let’s break down the important facts of this category and help make sense of what is being written out there.

What: Defining Private Market Investments  

Private market investments are individual investments and funds you can buy, but they do not trade on public exchanges. The four most referred to categories are:

• Private Equity (akin to public stocks)
• Private Credit, (akin to public bonds)
• Real Estate (akin to REITs)
• Infrastructure (akin to energy MLPs)  

Why: The Two Main Drivers of Growth

Private market investments have proliferated in recent years for two main reasons:

1) Bank Deleveraging: Banks now face higher capital restrictions designed to protect their balance sheets. This results in banks having less money available to lend to private companies.

2) Private Companies Stay Private Longer: Companies are delaying their IPOs and remaining private for longer periods. This allows them to grow without the headaches and regulatory pressure of being a public company, while still having ample access to necessary growth capital.

The Opportunity Gap: It is estimated that 85% of companies with revenue greater than $100 million are privately owned. This means the vast majority of growth is happening outside of the public stock market.

Who: The Key Players and Capital Scale

Private companies have ample resources to capital from large private market investment platforms such as KKR, Blackstone, Apollo, Brookfield and Carlyle. These may not be household names to you, but collectively they manage over $4 trillion of assets in these markets for their clients. These firms will continue to grow and raise capital for years to come.

How: Increased Access and Liquidity

Private market funds once were considered only for the very wealthy, yet access to these funds has improved markedly over the past couple of years. In the past, a 7-year commitment and lock-up period were standard, now many of these funds are offered in an ‘evergreen’ structure which reduces the initial lockup to one year and then allows for quarterly redemptions thereafter. These terms greatly improve the liquidity of the funds and more flexibility for the end client investor.

When: Fitting Private Markets Into Your Portfolio

Private market investments fit best when an investor meets three key criteria:

1. They have a long-term horizon.
2. They do not require near-term liquidity.
3. They are looking to increase diversification beyond public market stocks, bonds, and real estate.

What to watch for: Risk and Due Diligence  

Private market investments are often marketed as offering higher returns for lower risk, a combination some characterize as "too good to be true". It is vital to maintain the same due diligence as you would for any other investment:

• Valuation vs. Volatility: Private companies are not required to make as many financial disclosures as public companies and do not price their assets daily. This dynamic can make these assets appear less volatile, but this may not be truly reflective of the underlying risk.
• Higher Fees: Investment management fees on these funds are inherently higher than comparable public funds, making it important to read the fine print.

The key takeaway here is that private market investments are different from publicly traded securities, yet the same due diligence of risk and reward must be applied. They are like any other investment in that if they are used appropriately, then an investor will benefit, and if they are not, then complications will inevitably arise. If you have any questions or would like to learn more about private market investments, please let us know.

_{DISCLAIMER: Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this (article) serves as the receipt of, or as a substitute for, personalized investment advice from Elmwood Wealth Management. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.}