Private market investing explained
Private markets refer to investments in equity and debt of privately owned companies.
Private equity is equity capital invested in private companies. Investors hope that by investing in private companies they can increase a company's value and sell their stake at a later stage through a trade sale, buyout, a recapitalization or through listing the company on public markets through an initial public offering (IPO). Private debt funds typically target the ownership of credit issued by private companies that either seek more flexible financing terms or are neglected by banks due to the complexity of transactions. Private equity investments represent the majority of investments in private markets.
Portfolio companies are the end recipients of any private equity investment. General Partners (private equity firms) spend a great deal of time identifying the companies that have growth potential through very stringent due diligence processes.
Investing directly into private companies is known as direct or co-investments where there is no middleman. In this instance, it is important to have a deep knowledge of the sector of the company you are investing in. This allows the investor to be directly involved in the growth story of a company and realize returns on exit.
Are private markets for you?
- Long-term investment horizons and related illiquidity risk - Private equity investments are long term and should be viewed as having a 6-10 year investment horizon.
- Be aware of the J-curve effect – this refers to the cash flows for investors associated with a typical private equity investment. Investments are generally made in years 1–6 and realizations generally occur in years 3–10. Capital is "called" from investors as the general partners need it to make investments. When portfolio companies are exited or recapitalizations occur then investors receive payouts known as distributions. The "J Curve" effect can be minimized by making several private equity investments.
- Private equity is a complex asset class, which requires carefully considered and well-diversified allocation following a structured approach and investing over the cycle.