The hidden world of private markets.
EDITION 03: INVEST ON PURPOSE
Did you know…
99.9% of companies in the United State are private.
These are small businesses that have 500 or fewer employees, and make up 43.5% of the United State’s annual GDP.
Wild right? Because when it comes to investing, we mostly think about publicly traded mutual funds and companies, like Google, Amazon, Tesla, etc. When we think about private market investments (which, let’s be real, if we think about them at all), we think about exclusive hedge funds or private equity funds that often feel out of reach for most of us.
So, why don’t we know more about private market investments?
Imagine this…
You’re a millennial. Your parents, the media, the financial institutions all instilled a deep rooted understanding (ahem, fear ) to get investing in your 401(k) as soon as possible. You certainly won’t have a pension, and social security benefits are questionable by the time you are of the age to receive them.
But, like most of us, you are not an investment expert. You have a day job and immediate family responsibilities and trips you want to take and fiction novels you want to lose yourself in. You don’t have time to really understand what your investment options are beyond what the news tells you or the cursory overview your 401(k) provider gives.
So, you go for that 401(k) target date fund, maybe invest directly in a couple stocks from brands you really like, and as you get a little more money, you get a financial advisor who talks through some of your bigger investing goals and decisions.
You’re doing all the things you should be doing, with the knowledge that there are probably more investment options out there, but you just figure since no one is presenting them to you, they must be investments that are not for you, at least not at this time.
Let’s start deconstructing the myth that private market investments aren’t for us.
Welcome to Private Markets.
To understand private markets, let’s level set on public markets to make sure we’re all on the same page.
Think of public markets as the bustling stock exchange where anyone can buy and sell company shares. These are the companies you've heard of—traded daily, with transparent reporting and millions of investors. It's like the main stage of the financial world.
Private markets, on the other hand, are the companies that have not gone through an IPO and are not listed on a public exchange (the 99.9% from above). Private market investors help these companies build and scale by giving them access to capital they otherwise can’t get from a traditional option. These are typically longer-term investments that are regulated, but because they are private, the landscape is more opaque.
While there is a lot of nuance to unpack here, for today’s purposes, I will give you a tasting menu version and dedicate future newsletters to more detailed overviews.
Angel investments: Investments that individuals make into super early-stage companies and founders that they personally believe in and want to support.
Venture capital: Investments that venture capital firms make into startup companies. Investors place multiple bets, knowing most won't strike gold, but the few that do can fund entire portfolios.
Private equity: Investors who buy shares in private companies, strategically improve their operations and the company’s value, and aim to sell them for a profit.
Private credit: When banks say no, these investors step in with non-bank lending solutions. Investment return is in the form of interest payments, and the borrower makes payments until the loan is paid back in full.
Ok, why should you care about any of this? Because you might be leaving money on the table!
More companies are staying private longer. They're avoiding the pressures of public markets and building value more strategically.
By exploring private markets, you can:
Diversify your investment portfolio
Protect against economic volatility
Potentially achieve higher returns
Direct money to companies that you want to see more of in the world (see last week’s newsletter on Impact Investing)
I know, right, this sounds great.
So now you might be wondering why your financial advisor hasn’t mentioned private markets to you? Many financial advisors skip recommending private market investments to their clients because they make more money selling traditional financial products that trade frequently (like the public markets), and because they may have limited knowledge or access to private market opportunities. Basically, recommending private markets could eat into their bread and butter.
How to apply this…
Ok if you are overwhelmed don’t worry… we’ve got you. Let’s focus first on getting familiar with all of this.
Check out this article from Moonfare which provides a great simplified overview of the difference between private vs public investments.
Next, keep reading this newsletter as we breakdown the different types of private market investments over the coming weeks.
Finally, start a conversation with someone you know to bring private market discussions out into the daylight. Ask a friend if they’re invested or have considered private market investments before. Talk about what makes you excited or nervous about private markets. This doesn’t need to be an exclusive or taboo subject. The only way to make it less hidden and more accessible is to start talking about it.
In summary…
Private market investments aren’t only for the ultra wealthy—with the right knowledge, you too can tap into these opportunities to diversify your portfolio, potentially boost your financial future, and contribute to the 99.9% of companies in the US.
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Sources
https://www.uschamber.com/small-business/state-of-small-business-now
https://www.linkedin.com/pulse/why-financial-advisors-dont-recommend-private-logan-d-freeman/
