The first step of successful private market investing is to learn what private capital is, what its risks and rewards are, and how it differs from public market investing.
Private capital provides investors with the opportunity to pursue potentially higher long-term returns and greater diversification than are available through public securities markets alone. Private capital investments can be diversified by investment strategy, stage of development, vintage year (the year when a fund is raised, or its first investment is made), industry, manager and geographic location.
This blog is part of a series that focuses on the fundamental principles of private capital investing and the key steps to building and maintaining a well-structured private capital program. Click here to read part I.
What Characteristics Distinguish Private Capital from Public Market?
Private capital investing has several characteristics that distinguish it from the public securities markets.
-
Private capital markets are illiquid and inefficient relative to the public markets, a characteristic that gives astute managers the opportunity to gain access to and act on information about privately held companies that is not readily available to the public. In contrast, SEC disclosure regulations govern the release and use of material information by listed public companies, giving all public market investors equal access to such information.
-
Another significant difference compared to public securities is time horizon. Because of their illiquidity, private capital investments typically have a much longer investment period than those in public securities. Often, a manager holds an investment for anywhere from two to seven years, building value over that time, before exiting the investment. This makes market-timing next to impossible in private markets.
-
Perhaps most important, private capital investment managers are not simply financial investors. They often manage the companies in their portfolios actively, playing a material role in developing these companies’ strategies and adding significant value over the investment period. This relationship is often strengthened by private capital managers’ personal stake in portfolio companies, as they invest their own money in the funds they raise and thereby are directly affected by and concerned with the plans and actions they create and implement.
Which investment programs can be classified as “private capital”?
Following you will find a what can be considered traditional sectors of private capital.
-
Venture Capital consists of investments in start-up and early-stage, high-growth private companies, principally in information technology and life sciences.
-
Private Equity comprises investments in existing companies, most with positive cash flow or profit.
-
Distressed Capital is often considered a subset of private equity and generally involves identifying problem companies or troubled assets which managers believe can be significantly improved by implementing turnaround tactics and/or restructuring to unlock underlying value.
-
Natural Resources includes investments in oil- and natural gas-related companies and properties, as well as investments in alternative energy and in power-related companies.
-
Private Real Estate involves the acquisition or development of a real estate property.
Interested in learning more details on the characteristics of private capital investing?
