Long-term investors in search of their next big growth opportunities may do well to look beyond public equities to find them. As companies increasingly delay going public, much of their growth – and returns – occurs while still private – and that dynamic translates into an interesting opportunity set for private market investors. What’s more, with the advent and expansion of more investor-friendly vehicles, the private markets are increasingly becoming accessible to advisors and their clients.
A number of compelling reasons exist to encourage advisors to consider the private markets. One of the most compelling? Performance – or more pointedly said, historical outperformance of the public markets. Over the last three years, private equity generated a 42% premium over public equities as of December 31, 2020. Over a longer time horizon, private equity and private credit have each outperformed their global public equity and public credit benchmarks, respectively, in 19 of the last 20 vintage years.1
We anticipate that those return trends could continue, as a confluence of factors encourage firms to stay private longer, experiencing much of their nascent growth and value creation before an IPO. The first factor is control. Staying private gives executives more direction over their business and strategy. It also shields the company from the volatility that is a natural byproduct of being publicly traded.
The regulatory environment offers another cautionary flag for going public. Between Sarbanes Oxley, and then Dodd-Frank, regulations are becoming increasingly burdensome and costly. Logic holds that if private capital is available, companies might want to consider delaying a public listing longer than may have traditionally been the case.
Plenty of available capital has given companies time to wait. As of late 2019, private equity companies managed $3.4 trillion in investor commitments, up more than six-fold from 2000.2
Each of these factors plays a role in keeping companies private longer. We see this in the technology space, where, on average, the age of a new public company has gone from 4.5 years in 1999 to more than 12 years old.3 Two of the largest-ever tech IPOs, waited 10 and 12 years, respectively, before going public, long after they had disrupted the industries in which they operate.
A Growing Opportunity Set
As one considers the size and scope of the private markets asset class, it’s striking how much public equity investors may have been missing.
There are roughly 17,000 private companies with annual revenues of more than $100 million, compared to just 2,600 public companies with the same revenues.4
For the better part of 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 sentiment, 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 2020.5
For decades, access to private companies has been largely limited to institutional and ultra-high-net-worth investors. But that is quickly changing. There has actually been a recent regulatory push to give Main Street access to the growing private markets space, and we’ve seen regulators offer guidance on more investor-friendly fund structures that allow retail investors to participate.
The industry has responded in kind. In the past few months, several new registered private equity funds have launched, catering to advisors and their clients. Often referred to as “evergreen” funds, these strategies help to solve some of the challenges around liquidity, large capital commitments and timing delays in funding requirements that have traditionally been barriers to investing in the private markets for wealthy investors.
From the lens of a high-net-worth investor, these funds are attractive in that they offer a single-access solution to 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 for individual investors to not only access the private markets, but be able to do so while building fully diversified private capital portfolios alongside some of the largest institutional investors.
With the opportunity set in private markets being more than five times the size of the public market, advisors and their clients may do well to give these strategies a look.4 As companies continue to stay private longer, private markets may provide the solution clients need to achieve their long-term investment objectives.
1 Source: Bloomberg, Hamilton Lane Data via Cobalt. MSCI World TR Index used to represent public equities. Data as of 12/31/2020 (May 2021).
4 Source: Capital IQ, February 2021
5 Source: Research by Professor Jay R. Ritter, University of Florida.
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