Page 19 - Investment Advisor April 2021

ALTERNATIVE INVESTMENTS

By Josh Vail

Why Investors Seeking Growth Must Look

Beyond Public Equities

Private markets are opening to individuals and can offer them greater returns.

s long-term investors search for on major U.S. exchanges has still shrunk
their next big growth opportu- from more than 7,500 at the beginning
A nities, one thing seems certain: of 2000, to less than 5,000 at the end
They will have to look beyond public of 2020, according to a University of
equities to find them. Increasingly, com- Florida study.
panies are delaying going public, with For decades, access to private com-
much of their growth — and returns — panies has been largely limited to
occurring in private markets. institutional and ultra-high-net-worth
The upshot? Private markets increas- investors. That is quickly changing.
ingly are becoming accessible to advi- Sensing that Main Street is being left
sors and their clients. behind from the growing private mar-
There is good reason for advisors to ket, there has actually been a regulatory
consider them. Over the last three years, push to give them access.
private equity generated a 33% premium Each of these factors plays a role in The industry has responded in kind.
over public equities as of Sept. 30, 2020, keeping companies private longer. We In the past few months, several new
according to Hamilton Lane. Looking see this in the technology space, where registered private equity funds have
farther back, private equity and private the age, on average, of a new public com- launched, catering to advisors and their
credit have each outperformed global pany has gone from 4.5 years in 1999 to clients. More are on the way. Individual
public equity and credit markets respec- more than 12 years old, according to a fund details vary, but these strategies,
tively 19 of the last 20 vintage years. Skadden 2020 study. often referred to as “evergreen” funds,
Those return trends could continue, As more tangible examples, Uber and solve some of the challenges around
as a confluence of factors encourage Airbnb, two of the 10 largest-ever tech liquidity, large capital commitments and
firms to stay private longer, experienc- IPOs, waited 10 and 12 years, respective- timing delays in funding requirements
ing much of their nascent, explosive ly, before going public, long after they that have traditionally been barriers for
growth before an IPO. The first factor is had disrupted the industries in which wealthy investors.
control. Staying private always has given they operate. From the lens of a high net worth
executives more direction over their investor, these funds are attractive in
business and strategy. It also shields the GROWING OPPORTUNITY SET that they offer a single-access solution
company from the volatility that is a nat- Considering the size and scope of pri- to gain diversified exposure to the pri-
ural byproduct of being publicly traded. vate markets, it’s striking how much vate markets. What’s more, the mini-
The regulatory environment offers public equity investors may have been mum investment size may be as low as
another cautionary flag for going public. missing. There are roughly 20,000 pri- $50,000 in some cases.
Regulations are becoming increasingly vate companies with annual revenues This means it should be possible for
burdensome and costly and companies of more than $100 million, compared to individual investors to not only access
might want to consider delaying those just 3,000 public companies, according the private markets, but be able to do so
tomertu/stock.adobe.com panies time to wait. As of late 2019, of publicly listed companies has been institutional investors.
headaches as long as possible.
while building fully diversified private
to Capital IQ.
And plenty of capital has given com-
For almost two decades, the number
portfolios alongside some of the largest
in steady decline. While IPOs increased
Advisors and their clients would do
private equity companies managed $3.4
well to give these strategies a look.
in 2020 as some companies sought to
trillion in investor commitments, up
more than six-fold from 2000, according
take advantage of buoyant investor sen-
to a 2019 Kenan Institute report.
timent, the number of companies listed
Josh Vail, CAIA, is president, 361 Capital.
APRIL 2021 INVESTMENT ADVISOR 17