Private Market Investing: Rewards, Risks, and Considerations
Private market investing has become an increasingly popular way to access innovation early and diversify beyond public markets. But as with any investment strategy, it comes with trade-offs.
In this post, we break down the rewards, risks, and four key considerations of private market investing.
The Rewards: Why Investors Participate
Private markets can be compelling for investors seeking more than traditional stocks and bonds. Some of the key benefits include:
Asymmetrical Return Potential
Unlike public equities, where returns often mirror overall market trends, private investments can offer 5x, 10x, or even 50x outcomes if a company achieves breakout success.Early Access
Investors gain exposure to companies before they’re widely known or listed on public exchanges. This means getting in alongside institutional investors and top-tier venture capital firms.Diversification Beyond Public Markets
Private equity has a low correlation to public stocks and bonds. For long-term investors, this can create a more resilient portfolio that isn’t tied solely to public market cycles.Tangible Innovation Exposure
Investing privately means supporting founders directly as they tackle real-world challenges in areas like artificial intelligence, fintech, and clean energy; not just trading a stock ticker.
The Risks: What to Consider Before Investing
While the rewards are attractive, private investing is not risk-free. It’s essential to be aware of:
Illiquidity
Capital is typically tied up for years. Exits only happen if there’s an IPO, acquisition, or limited secondary market opportunity; even then, restrictions often apply.Startup Failure Rates
In early-stage investing, many companies may fail completely. Outcomes are heavily dependent on a small number of outsized winners, a dynamic known as the “power law.”Valuation Risk
Late-stage private companies often carry high valuations. If growth slows or the IPO market stalls, investors could face significant downside.No Daily Price Transparency
Unlike public stocks, private investments don’t update daily. Valuations are determined by major events such as funding rounds, acquisitions, or IPOs, not continuous trading.
4 Key Considerations for Investors
Investors should evaluate multiple factors when participating in private markets:
Entry Points and Investment Vehicles
Consider the range of private investing opportunities, including pre-IPO investments, early-stage funds, late-stage private companies, and special purpose vehicles (SPVs). Each offers different levels of risk, liquidity, and potential return.Portfolio Fit and Diversification
Assess how private investments fit within your overall portfolio. While they offer diversification benefits, they should complement public equities, bonds, and other assets, not replace them.Sector Exposure and Trends
Private investing allows you to tap into emerging sectors such as AI, fintech, clean energy, and biotechnology. Understanding the trends and growth potential in these industries is key to informed decision-making.Time Horizon and Risk Tolerance
Private investments typically require long-term commitments. Ensure your time horizon and risk tolerance align with the illiquid nature of these opportunities.
Balancing Rewards, Risks, and Considerations
Private market investing isn’t for everyone. It requires patience, risk tolerance, and a willingness to commit capital without daily liquidity. However, for investors seeking early access to innovation, portfolio diversification, and potential for outsized returns, private investing can play an important role in a long-term strategy.
DISCLOSURES
This information is provided for guidance and information purposes only. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This information is not intended to provide investment, tax, or legal advice.