An Investors Guide to Private Markets

An Investors Guide to Private Markets

April 05, 2024

Private market investments provide investors access to innovative financial solutions including tax-deferred income, higher returns with lower volatility, and diversification beyond public stock markets.

Once reserved exclusively for institutional investors, recent breakthroughs in the financial industry have made these more accessible to individual investors. When compared to institutional investors, individuals’ portfolios are largely under-allocated to private markets.

Why are private markets attractive?

  • Private markets represent a significant investable universe and are more accessible than ever. “Even among the 5.7 million firms with employees, less than 1 percent of them have shares listed on a U.S. stock exchange” (Forbes)
  • Private real estate, private equity, and private credit are large, growing asset classes with strong historical performance and low correlation to public markets.
  • Private markets can be used as core portfolio building blocks to enhance traditional portfolios for all environments, including challenging ones for public markets.

What are the main private market asset classes?

Generally, private markets fall under three primary asset classes: private real estate, private credit, and private equity.

Private real estate provides investors access to tax-deferred income. This is because a large portion of the income is treated as “ROC” (return of capital) and depreciation (a non-cash expense that defers distributions). Investors benefit from private real estate in taxable accounts as most of the income distributed is tax deferred.

Private credit encompasses loans to companies by non-bank lenders (outside of the traditional banking system). These loans result in a simpler lending process and allow customized terms that protect the capital of the investor. Similar to how a mortgage is protected by the value of a house, private credit loans are protected by the assets of a company. These loans are typically floating-rate loans and are accompanied by lending fees, both of which generate income for the investor.

Private equity includes investments in privately held companies, ranging from startups to large private enterprises. As the vast majority of U.S. companies are privately owned, investment opportunities in private equity far exceed those in public markets. Private equity managers can transform companies through value-creation capabilities such as informational advantage, strong governance, and customized terms.

How can I access private market investments?

Private market investments are typically structured as limited partnerships or semiliquid funds. These structures allow managers to actively manage assets while providing investors with exposure to illiquid investments. Individuals considering allocating to private markets must work with their financial advisor as these investments are not available to the general public.

For more information on private market investments and how they can fit in your investment strategy, feel free to schedule a complimentary call with an expert. Click here to schedule a call.