Over the past 20 years the number of publicly traded companies has roughly been cut in half from about 8,000 companies to a little over 4,000 companies currently, as shown by this graphic below.
The primary causes of this is the increased regulatory burden and easier access to private capital, which have caused many companies to stay private for longer.
Another factor is the rise of large tech companies, like Microsoft, Google, Apple and Meta (formerly Facebook) which have been serial acquirers of smaller tech companies.
IMPACT TO INVESTORS
One impact of the smaller number of public companies for investors has been higher stock market valuations in the US. In a period of loose monetary policy there have been a lot more available dollars chasing a smaller number of companies.
A secondary impact has been that large institutional investors like pension funds and endowments continue to allocate more of their investment portfolio to private investments.
One of the issues long term is this creates an unfair advantage because not all investors have access to private markets due to accredited investor rules.
ACCREDITED INVESTOR REQUIREMENTS
The accredited investor rule is meant to protect smaller investors, since private markets are less transparent, but ultimately it limits the availability of many private investments to a large pool of investors who don’t meet the accredited investor requirements.
However, many other investors do qualify as accredited investors which means a household income of $200,000 for an individual or $300,000 as a couple in each of the prior two years and reasonably expected to have this for the current year, or a net worth exceeding $1million dollars excluding primary residence.
THE MANY FLAVORS OF PRIVATE MARKETS
When we say private investments, we simply mean these investments are not available for purchase on the publicly traded market exchanges that most investors are familiar with like the New York Stock Exchange or Nasdaq.
We have been fielding a lot of questions recently about various private investments, so we wanted to give a brief overview of the private investing landscape.
- Private Equity: Investments in private companies or buyouts of public companies, focusing on long-term capital appreciation.
- Venture Capital: Funding for startups and early-stage companies with high growth potential, in exchange for equity.
- Hedge Funds: Pooled funds using diverse strategies to earn active returns, often involving leverage and derivatives.
- Real Estate: Direct investment in properties or through funds, offering income through rent and capital appreciation.
- Private Debt: Investments in non-publicly traded debt instruments, offering higher yields compared to public markets.
- Infrastructure: Investments in physical assets like transportation and utilities, providing stable, long-term returns.
- Commodities: Direct investment in physical goods or through specialized funds, acting as a hedge against inflation.
- Collectibles and Art: Investment in tangible assets like art and antiques, requiring specialized knowledge.
As you can see, the private investor landscape is rather large, and even within these different categories there’s a lot of nuances and different investment vehicles.
EVALUATING PRIVATE INVESTMENTS
Private investments in general often involve higher risks and less liquidity, but can produce attractive returns and diversification benefits when used appropriately in a portfolio.
However, investors need to be wary because the dispersion of returns in private markets is generally much wider than public markets, so each private investment should be reviewed on a case by case basis, and investors need to understand all the risks before investing.
As a hypothetical example, the difference between a top and bottom quartile large cap blend manager attempting to outperform the S&P 500, might be 1% or less but the difference between a top and bottom quartile private equity manager can easily rise into the double digits.
This is especially important to keep in mind, as the number of private investment funds without a long track record has exploded in recent years. According to data from the SEC shown in the chart below, the number of private equity funds in the US grew to 18,000 by 2021, an increase of over 60% in the prior five years from (2016-2021). Meaning investors need to be extra careful as there are a lot of new and inexperienced private investment funds potentially soliciting them for money. This is especially true with the rise of the internet, where it is easier than ever for scammers to attempt to capitalize on the boom in private investments.
DO YOUR DUE DILIGENCE
While all investments involve risk and sometimes don’t turn out as planned, we can’t stress enough the importance of doing your due diligence on private investments before investing. We believe it is best to vet each private investment opportunity on a case by case basis, with the help of an experienced financial advisor. We have unfortunately, over the years, seen too many investors get into investments that sounded too good to be true on the front end, only to find out they had limited ability to exit the investments when they did not turn out as planned.
