When it comes to investing, there are two main types of markets: private and public. In this blog post, we will explore what private markets are and how they work.
We will also take a look at the advantages and disadvantages of private markets compared to public markets. Plus, we will provide tips on how you can invest in private markets if you're interested!
What private market means?
A private market means a market that involves transactions between two parties that are not conducted through a public exchange. Private companies are not listed on stock exchanges, and their shares are not available for purchase by the general public.
There are also private investment funds, which are pools of capital that invest in privately held companies. Make sure to keep reading because we will discuss private market funds a little later on.
What are private market companies?
Private market companies are companies that are private (not listed on a public exchange) and are not required to disclose their financial information to the general public. Private companies can raise capital through equity funding, debt financing, and other means.
Many companies are private for various reasons. For example, small companies may be private because they are not yet profitable and don't want to deal with the added scrutiny and regulations that come with being a public company.
Other companies may be private because their owners want to retain control and don't want to sell shares to the public. Whatever the reason may be, retail investors typically cannot invest in private companies unless they are accredited investors or have some other connection to the company.
We will discuss how to invest in private companies later in this article but, all you need to know for now is that it can be difficult for the average person to invest in them.
How private markets work
The working of private markets is simple. It all starts when a company decides to raise money through private markets. The company then approaches a group of potential investors, which can include venture capitalists, private equity firms, and wealthy individuals.
Private markets examples
As mentioned earlier, private markets are transactions between two parties that are not conducted through a public exchange. A few examples of private markets include:
This is a type of private equity that is used to finance early-stage, high-growth companies. Venture capitalists typically invest in companies that are not yet profitable and have high growth potential. Some famous examples of venture capital funds include Andreessen Horowitz and Sequoia Capital.
Private Equity Firms
These firms raise capital from institutional investors and use it to invest in privately held companies. Private equity firms typically invest in companies that are larger and more established than venture-backed companies. Some examples of private equity firms include KKR and Vista Equity Partners.
These are privately owned investment funds that use a variety of strategies to generate returns. Hedge funds are only available to accredited investors and usually have high minimum investment requirements. Some examples of hedge funds include Bridgewater Associates and Two Sigma Investments.
These are individuals with a high net worth that invest their own money in privately held companies. Wealthy individuals can also pool their money together to form private investment funds. They can sometimes be referred to as "angel investors" or "accredited investors."
Who can invest in private markets?
Typically, only accredited investors and institutional investors can invest in the private markets. Accredited investors are individuals with a high net worth or income. They must meet certain criteria set forth by the Securities and Exchange Commission (SEC).
Institutional investors include pension funds, endowments, and insurance companies. Venture capital can be considered a type of private equity.
The reason why only accredited investors and institutional investors can invest in the private markets is that these types of investments are considered to be high risk. They are also illiquid, which means that it can be difficult to sell your investment.
Although through equity crowdfunding, that is starting to change. However, equity crowdfunding is still in its infancy and there are not a lot of platforms to choose from. It's not completely clear if this form of investing is considered to be private or public.
It can be considered public because more people have access to it, but it can also be considered private because the companies that are raising money through equity crowdfunding are typically not well-known and not listed on any major exchanges.
What is the difference between private and public markets?
Before we get into the benefits of drawbacks of each, let's briefly review the definition of each. Public markets are markets where securities are traded between investors through a public exchange.
This includes markets such as the New York Stock Exchange (NYSE) or the Nasdaq. Private markets, on the other hand, are markets where investments are made through private channels, such as venture capital firms or wealthy individuals.
Now that we have a better understanding of the difference between private and public markets, let's take a look at the pros and cons of each.
Private markets vs public markets
To decide which path of investing to go down, you need to understand what you're looking for in an investment. Are you looking for stability or high growth potential? Do you want to be a hands-on investor or hands-off?
Your answers to these questions will help you decide whether private markets or public markets are right for you. However, by understanding the following benefits and disadvantages of each, you should be able to make a more informed decision.
Advantages of private markets
There are a few main advantages of private markets. Here are some of them for both investors and the companies themselves.
You can achieve higher returns
Since private companies are not as well known, they tend to be less expensive than public companies. This means that there is more potential for growth and for you to achieve higher returns on your investment. Increasing your net worth through private market investing is a great way to diversify your portfolio.
You can have more control
When you invest in a private company, you typically have more control over the company than if you were to invest in a public company. As a private investor, you can own a larger percentage of the company. If you are offered advisory shares, you can also have a say in how the company is run.
You can get in on the ground floor
Private companies are typically earlier in their life cycle than public companies. By being a part of the company's growth, you can feel a sense of pride and ownership. Additionally, you may be able to get a seat on the board or have some other form of involvement in the company.
Can keep competitive advantages secret
In the private markets, companies don't have to disclose as much information as they do in the public markets. This means that they can keep their competitive advantages secret.
This is important because it allows them to maintain a competitive edge and avoid getting copied by their competitors. Some startups even take a stealth mode approach.
Less short-term pressure
Private companies don't have to worry about meeting quarterly earnings estimates as public companies do. This is because they can take a longer-term view and don't have to sacrifice long-term growth for short-term gains.
Can be more flexible with business models
Private companies are not as constrained by their business model as public companies are. This allows the companies to be more flexible and change their business model if necessary. SEC requirements are also less stringent for private companies.
Disadvantages of private markets
As you can see, there are some major advantages to private markets, but to be fair, we must look at the disadvantages as well.
You can lose all your money
The biggest disadvantage of private markets is the risk of monetary loss. Private companies are more likely to fail than public companies. This is because they are less established, have less history, and are not as well known.
You may not be able to cash out
Another disadvantage of private markets is the lack of liquidity. With no public market for these investments, you will have to find a buyer who is willing to pay what you are asking for your shares.
This can be difficult and time-consuming. A lock-up (vesting) period may also apply, preventing you from selling your shares for a certain period.
You may not have the same level of protection
Private markets are where fraud and scams can be rampant. Private companies are not required to disclose as much information as public companies. This makes it easier for fraudsters to take advantage of investors.
You may not have voting rights
Another potential disadvantage of private markets is that you may not have voting rights. This means that you will not be able to have a say in how the company is run. If the democratic process of having your voice heard is important to you, then private markets may not be the right investment for you.
Advantages of public markets
Many people invest in public markets because of the advantages that it offers. Let's take a look at what these advantages are.
Buy and sell easily
One of the biggest advantages of public markets is that you can buy and sell easily. This liquidity can be a big advantage, especially if you need to sell your investment quickly.
Public markets offer a lot of diversification. This can be a big advantage, especially if you're looking to reduce risk. Sure, you can diversify in private markets but index funds in public markets make it much easier.
Public companies have to disclose a lot of information. This can be a big advantage if you're looking for transparency. Private companies don't have to disclose as much information, so it can be harder to know what's going on.
Easy to get into
The average person can begin investing in public markets with just a few hundred dollars. This can be a big advantage if you don't have a lot of money to invest. Private markets can be much harder to get into, especially if you don't have a lot of money.
Can get help from professionals
If you're investing in public markets, you can get help from professionals such as financial advisors or even a mentor. If you're not sure where to start or what to do, this can be helpful. Although they might cost you a fee, they can help you make the most of your investment.
Can be much more simplistic
If you are investing through public markets with a simple plan such as index investing, it can be much simpler than private markets. This can be an advantage if you don't want to put a lot of thought into your investments.
Disadvantages of public markets
Although many people have made money in the public markets, some disadvantages do exist. By being aware of these disadvantages, you can make a more informed decision about whether or not public markets are right for you.
Can lose money
Similarly to private investments, one of the biggest disadvantages of public markets is that you can lose money. This is especially true in bear markets or stock market crashes when stock prices are falling. If you aren't picking stocks with sound judgment, you could end up losing a lot of money.
Another disadvantage of public markets is fees. When you buy and sell stocks, there are usually commissions or fees involved. These fees can eat into your returns, especially if you're not careful about how much you're paying.
Public markets can be volatile, meaning prices can go up and down a lot. This can be scary for some investors, especially if they're not used to it. If you're investing in the public markets, you need to be prepared for the ups and downs.
With a public market, open participation from the masses can cause short-term price movements based on emotion rather than reason or fundamentals.
How to invest in private markets
The best way to invest in private markets is through private market funds. These funds are managed by investment firms that specialize in private market investing. The firms invest in a variety of private companies, including startups, real estate, and hedge funds.
Private market funds are not available to everyone. They are only available to accredited investors, which include high-net-worth individuals and institutional investors. If you're not an accredited investor, you can still invest in private companies through crowdfunding platforms.
Crowdfunding platforms allow anyone to invest in private companies. However, there are some risks associated with crowdfunding. For example, you may not be able to get your money back if the company fails.
As we mentioned earlier, equity crowdfunding can be a good way to diversify your portfolio. Dividends, or an ROI (return on investment), are not guaranteed. Although, they do allow retail investors to invest in shares of companies pre-IPO.
Investing in private markets can be a great way to get access to high-growth companies. If early-stage investing is your preference, then you should definitely consider equity crowdfunding or private funds if you have access to them.
Private markets are not always accessible for some people. Many people opt to invest in the public route due to the numerous benefits listed above. However, for the dedicated investor with higher risk tolerance and knowledge of company analysis, private markets can offer unique opportunities.
The key is understanding what you're investing in and making sure you're comfortable with the risks. With a little research and a solid understanding of the companies you're investing in, private markets can be a great way to both diversify and grow your portfolio.
What are your thoughts on private markets investing? Have you ever considered it for your portfolio? Let us know in the comments below!