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Private Capital Investing vs Public Market Investing, What’s the Big Difference?

April 10, 2019  | by Commonfund

Private Capital

The first step of successful private capital 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? 

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.