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Over the past 20 years, private markets have increasingly provided new and alternative opportunities for investors to consider. Not only have these investments offered the potential for superior returns with significant capital gains but also a good means by which to diversify assets in a portfolio. In essence, Private Markets are investments made in assets that are not traded on traditional public capital markets or exchanges.

As we experience challenges to the global economy due to war, logistical complexities, rising interest rates, inflation, and stock market volatility or uncertainties, Private Markets are growing in interest and becoming a good alternative for investment. As such, Private Markets have experienced rapid growth in recent years. As a matter of fact, PwC has estimated that assets under management (AuM) in private markets are expected to increase nearly $5 trillion between 2021 and 2025, reaching approximately $15 trillion in total. These investments will constitute more than 10% of global assets under management showing an impressive 12.2% CAGR since 2004.

However, it is not easy to access the private market and investing in such asset classes tends to bring numerous challenges to investors. These assets are not traded publicly on any exchange, and awareness or information is hard to come by. These deals do not provide a prospectus nor the typical quarterly or annual financial reporting that traditional investors may be accustomed to analyze prior to making an investment decision. These investment opportunities can range from private debt to private equity to an array of real estate and infrastructure initiatives. Furthermore, many of these projects may be pre-revenue or early-stage initiatives and come with significant risk and perils. When considering risk, investment approaches and strategies should vary depending on the unique needs and objectives of the investor. While some investors simply do not have a taste for these investments, it is important to note that savvy investors may find differentiation for their portfolios through alternative investments. In addition, investors may find accessibility to invest throughout the different capitalization stages and growth of these companies with the possibility of reaping higher returns.

Advantages of investing in private markets

Having a Higher Return

The Efficient Markets Hypothesis suggests simply that you cannot “beat the market” because public securities are efficient, information is freely available to all participants and the equities will hence trade at fair market value.  However, private markets are inefficient and are known to trade well below true market values thus providing investors an opportunity to beat the market. If we compare the returns of the last few decades, the investments in the private market sectors have outperformed the securities trading publicly both in terms of debt and equity.  According to Hamilton Lane’s 2022 Market Overview, private equity generated an extra 83 cents per dollar invested since 2017. However, an added level of scrutiny, experience and monitoring may be required to assess the corresponding attributes of each opportunity and asset class. As such, it may be of benefit to count on an experienced private market or private equity firm to help you make more asserted decisions as they can bring to the table a thorough understanding of a specific industry and may add value having the necessary insights for better decision making.

Being more diversified

One factor to consider is that private markets are not highly correlated to public markets which helps contribute towards portfolio diversification. Private market funds are also available to further diversify within the class of alternative investments. Alternative investments have typically been reserved for experienced and more sophisticated investors, but even institutional investors have caught on to the diversifying potential of private assets. It is worth considering that in traditional capital markets, the link between valuations and fundamentals has grown weaker, thus investors have been looking to diversify away from these factor; whereas, private markets offer reduced cyclical exposure, greater idiosyncratic risk, restricted access and a wider breath of opportunity.

According to the Schroder Institutional Investor Study, private assets are growing in popularity increasingly due to their ability to diversify portfolios. Through the strategy of combining different private asset classes, such as private equity, venture capital, private debt, infrastructure, and other types, investors can put themselves in position to benefit from exposure to different return, risk and liquidity profiles.

There are two main categories that investors look to improve on: Diversification and Return Enhancement. Private Equity, for example, can be a source of enhanced returns. Other categories have multiple functions. Private credit can provide inflation protection, yield and enhanced returns. In addition, Real Assets can offer diversification, yield, volatility mitigation, and inflation protection. Each class serves a purpose and offers benefits.

While private bank clients often consider diversifying 15%-30% of their overall portfolio into alternative strategies, some clients with significant resources allocate 50% or more to alternatives.

Accessing a greater opportunity set

The investable opportunity set is significantly larger than that found in the public market space. As a matter of fact, the investable universe of private companies is approximately 850% larger than public companies. In a 2022 study by Hamilton Lane, the magnitude of the private market and its available opportunities can be appreciated by a simple comparison: 95,000 private companies globally report annual revenues over $100 MM versus 10,000 public companies with similar revenue performance. Furthermore, opportunities can be found across a large spectrum of companies at different stages of their life cycle. Provided that companies are waiting longer and longer before going public, and returns are clipped because of the increased maturity of companies going IPO, investors are finding a large universe of opportunities at earlier stages in private markets.

Negotiating the terms

One of the best parts about investing in the private markets is that the investor has the added advantage of negotiating the terms of the investment. This advantage is not afforded through public market investments.

Conclusion

If you are a sophisticated investor and are concerned about current market conditions, you may want to explore opportunities in private markets to enhance returns and diversify your portfolio. Start by doing your research and reach out to a few private market investment firms for ideas and recommendations. Always remember that you should assess your risk tolerance and over all portfolio allocation before making any decisions. In addition, it is important to consider that private market opportunities may require longer term investments with patience and understanding the liquidity challenges of some of these investments.


About Konzortia

Konzortia Capital is a FinTech consortium providing VC/PE deal-sourcing for Investors and funding opportunities for Start-Ups. As part of our value proposition, we promise to Source – Match – Exit. Konzortia provides deal sourcing through our Distributed Ledger Technologies (DLT) and Intellectual Property (IP). The recent  acquisition of Paraforge allows Konzortia Capital to provide differentiated services and greater operational efficiency through its InvestHub platform for the needs of the Deal Flow sector. 

Konzortia Capital’s solutions reduce risk for investors providing significant vetting thus eliminating much of the uncertainty of non-operational early-stage companies, combined with the assurance of market fit, but still within a very modest valuation giving investors the possibility of experiencing high growth.

About InvestHub

InvestHub is Konzortia Capital’s platform for Source – Match – Exit. The platform leverages Paraforge, an applied learning artificial intelligence technology that perfectly marries large-volume data aggregation while[RA1]  leveraging machine learning (ML) and artificial intelligence (AI) for investors sourcing deals and Start-Ups interested in raising capital and achieving liquidity sourcing.

For more information, please contact info@konzortia.capital or visit our website at https://konzortia.capital/.