Testing Times for Investors: Public vs Private Markets?

Now that the golden age of private markets has arrived and public markets are shrinking to less than 50% of their hey-day, how do you translate public market investing sensibilities into the larger private markets?

Private markets are booming. Unfortunately, many of the most sophisticated investors are caught re-trimming their sails for an entirely new prevailing wind. I was just speaking at the annual Georgia Association of Pension Plan Trustees meeting on venture capital. The group had a big issue on their minds — options are disappearing. The public markets–all of them, like the S&P 500, the Dow, etc.–only contain about 3,700 companies in the U.S. today. In 1996, that number was 7322. For sophisticated investors that grew up in the hey-day of public markets, this reality is jolting. As one seasoned public pension trustee put it, “Today it’s less about which strategy you choose because you can only slice it so many ways. Now, it’s more about avoiding the bad stocks because you need all of the good ones.”

Meanwhile,  private markets are mushrooming. Every year, there are 6000 or so new financings in venture capital. From my perspective in talking with hundreds of founders, many never intend to go public. They’re looking for the right acquisition and thinking more thoughtfully than ever about how what they’re building fits in. It makes a ton of sense.

Globally, private equity companies have a trillion in capital to deploy in private markets. Some of that money will undoubtedly be used to reprivatize some of the companies that are public today, like Tesla that would prefer to be private. While there are definitely issues to be concerned about in the private landscape, the larger environment is simply this: the world is modernizing.

Electrification, clean water, communications infrastructure, payments infrastructure, and transportation all have significant expanding tech frontiers, even in the U.S.  It’s private companies, not public ones (which are more tied to government regulations in specific jurisdictions) colonizing this new era of exploration because the risks are real.  Private companies have more degrees of freedom in how to approach them. The good news is, many of the tried-and-true sector strategies that worked for institutional investors in the golden age of public markets translate well to private markets.

Antoine Drean, a serial private equity entrepreneur and the founder of secondary PE market Palico, says we are now in “the golden age of private equity.” The question for sophisticated investors today who have a legacy in public equities and a commitment to thoughtful portfolio orchestration is, how do you expand into the private markets in a way that complements your existing portfolio? Those opportunities are increasingly available more in private than public offerings. While the translation of investment strategy isn’t simple, it also isn’t insurmountable with the right support along the way–and the opportunities are worth the effort.