Private Markets Investing: What It Is & How It Works

February 20th, 2024
7 minutes read

Private markets are investments in debts and equities that are not listed on a public stock exchange. These markets provide investment opportunities for investors seeking potentially higher returns and diversification beyond traditional public markets, including venture capital, private equity, real estate, and alternative investments.

Key Takeaways

  • Private markets facilitate direct deals between investors and businesses, away from public platforms. Investment crowdfunding has democratized access to these opportunities.
  • Private market investing covers a range of assets including stakes in private companies (private equity), startups (venture capital), real estate, and private debt.
  • Private investments can be riskier but potentially more lucrative than public stocks. Returns depend on factors like company growth and industry performance.

What are Private Markets?

Private markets offer investment opportunities that are not publicly listed assets. Instead of being regulated by government agencies like the Securities and Exchange Commission (SEC) in the US, and the European Securities and Market Authority (ESMA) in Europe, private markets are less regulated and serve a wider range of companies, especially smaller ones.

Usually, only high-net-worth people or big organizations can get into private markets because of rules set by regulators. Deals in private markets happen directly between the people involved, without using official stock exchanges.

Starting in 2012 with a law called the JOBS Act in the US, a new way to invest in private companies emerged called equity crowdfunding. This lets regular people invest in private companies online. Websites connect entrepreneurs who need money with many different small investors, making it easier for everyone to get involved in private markets.

The private markets, especially the private equity sector, are experiencing significant expansion, highlighted by the unprecedented surge in global private equity dry powder, which reached nearly $2 trillion in 2022.[1]

How Private Market Investing Works?

Much of the world’s economy is owned by private individuals or companies. Instead of going public on the stock market, many businesses, properties, and infrastructure projects choose to get money from private investment funds to help them grow. You can invest in these private markets by:

  • Buying ownership in private companies (Private Equity).
  • Investing in new and growing companies (Venture Capital).
  • Putting money into real estate properties.
  • Lending money directly to private businesses or individuals (Private Debt).

Accredited investors or institutions usually participate due to regulatory requirements. However, the advent of crowdfunding investment, particularly equity crowdfunding, lending-based crowdfunding, and real estate crowdfunding, has democratized access to private markets for retail investors.

When deciding where to invest, people look at things like how well a company is managed, how big its market could become, and its financial health. Unlike stocks you can easily buy and sell on the stock exchange, private investments can be harder to sell quickly.

Private investments can be risky, but they might also make more money than public stocks.[2] Whether you make money depends on things like how fast the company grows and how well its industry is doing. When it's time to get out of the investment, you might sell it to another company, make it public through an IPO, or find someone else to buy it.

Private Markets vs. Public Markets

There are some significant differences in the public and private markets including investor access, regulations, capital raising methods, valuations, liquidity and exit opportunities.

 CharacteristicPublic MarketsPrivate Markets
 AccessOpen to anyoneSome investments are limited to wealthy investors
 RegulationStrict rules and disclosure requirementsLess rules and less disclosure is required
 Capital RaiseIPOs or selling shares on stock exchangesFunding from select investors or firms
 ValuationEasily seen through stock prices and high valuationsOnly visible at fundraises and lower valuations
 LiquidityShares can be easily bought and sold at brokersInvestments are typically hard to buy and sell
 ExitVarious options like selling shares or mergers and acquisitionsMore direct exit options, exits can be challenging

Private Market Investing Benefits

Private markets allow investors to participate directly in the real economy, which means investing in businesses and assets that are not publicly traded. This offers opportunities that don’t move in sync with traditional investments like stocks and bonds.

  1. Firstly, it can potentially yield higher returns due to access to early-stage companies and the illiquidity premium.
  2. Secondly, private market investments provide diversification, lowering overall portfolio risk.
  3. Thirdly, they offer unique opportunities such as venture capital and real estate. Additionally, private investments often have longer horizons, aligning with investors' long-term goals.[3]

Furthermore, investors may exert more control and influence over their investments, particularly in private equity or direct investments. There are potential tax benefits and the opportunity to support innovation and economic growth. Lastly, private investments tend to be less affected by short-term market volatility. However, investors should be aware of risks such as illiquidity, lack of transparency, higher fees, and potential capital loss. To mitigate these risks, careful due diligence is necessary before investing in private markets.

What is an example of a private market?

A private market is akin to a “secret clubhouse” for investing. Instead of buying and selling stocks on major public platforms, it's where wealthy individuals and companies make deals directly with businesses. With investment crowdfunding, everyone can now access private market opportunities.

For instance, if you have a lemonade stand and need money to grow, you might find a wealthy individual willing to invest in exchange for a stake in your business. These transactions are private, meaning they're not open to everyone. It's a more personal way of investing, where deals happen behind the scenes, away from the hustle and bustle of the stock market.

What are private market funds?

Private market funds are like investment clubs where people pool their money together to invest in things that are not publicly available.[4][5]

  • Private Equity Funds: These invest in companies that are not listed on the stock market, hoping to make them more valuable over time.
  • Venture Capital Funds: These invest in new or small companies that they think will grow a lot in the future, like tech startups.
  • Real Estate Funds: These invest in properties like houses, offices, or stores, aiming to make money from renting or selling them.
  • Infrastructure Funds: These invest in big projects like highways, airports, or power plants, expecting to make profits from them over a long time.
  • Hedge Funds: These are super flexible investment funds that can invest in lots of different things, including private market opportunities.

Is private equity a private market?

Private equity is part of the private markets", where investments aren't publicly traded. In private equity, investors put money into companies directly. Other private market investments include real estate and startups. These investments are riskier but can offer higher returns compared to stocks you might buy on the stock market.[6]

Article Sources

  1. S&P: “Look Forward - Private Markets - Volume 2 - April 2023
  2. World Economic Forum: “Broadening Access to Private Markets (2023)
  3. Perpetual Trustee Company Ltd: “Diversifying Portfolios with Alternative Assets
  4. Hamilton Lane: “Private Markets - A Guide for High-Net-Worth Investors
  5. CFA Institute: “Private Equity Investments
  6. The Investment Association: “Private markets – what they are and why they are important