The world of private market investing has become increasingly intriguing to investors. The phrase private market investing is often interchanged with private equity, venture investing and direct lending. Private markets are easy to participate in, filled with robust opportunity and have historically offered attractive returns.
According to Preqin, since the financial crisis of 2008, private markets have grown steadily and consistently, with private capital funds having raised nearly $5 trillion since 2012. This, in combination with the lower returns in many stock and bond markets in recent years, has made private market investing all the more appealing.
However, there are a lot more risks and challenges involved in these investments than in public assets as a result of reduced disclosure combined with asymmetric information, illiquidity, execution challenges and manager risk. This makes connections to opportunities, extensive due diligence and access to industry experts crucial necessities.
Let’s start on the bright side. What are the major opportunities available for private market issuers and investors?
1. New Regulation:
Regulations play key roles in driving private markets. New regulations have been implemented globally to place the government in a prime position to drive more activity in private markets.
2. New Technology:
Technology affects everything and everyone. It has advanced the capital markets by creating new business propositions for market players and new models that are more accessible for the industry. Recently, we have observed an increase in financial services such as crowd-funding, peer-to-peer lending, digital currencies, mobile banking, and challenger banks. All of this has created a change in the normal way of doing things, even in private markets. This advancement is considered overdue as the market is highly fragmented and relies much on paper-based processes.
3. New Networks:
Naturally, private markets lack organization and interoperability. These markets also have a low level of transparency. Usually, only investors who are of close proximity to the offering get to enjoy access to private market opportunities. This is often a small percentage, creating an uneven playing field that tilts in the favor of big investors. Market actors within private markets have the opportunity to develop a novel, more global and interoperable approach through an efficient networking system, which will be beneficial for the whole ecosystem.
Challenges in Private Markets
There are several well known challenges that plague private markets, in spite of the opportunities within them.
Some of these major challenges of the secondary market are:
1. The infrastructure and network in private markets are usually cumbersome, and contact management functions are still very manual and paper based.
2. Poor asset discovery due to the lack of connectivity between private market participants.
3. Poor price discovery and general asset information as a result of the fragmented infrastructure.
4. Illiquid market caused by the poor transferability of information and localised market, which is a barrier to entry for many investors.
A common error made when private market investing is the tendency to rush in to invest when the market is at its peak. This is erroneous because often, private markets tend to fall rapidly after peaking, with plenty of variation in the market’s performance over past years. Cultivating a long-term time frame and a process of institutionalised learning can help.
Having continuity of staff and choosing good managers also helps in terms of making subjective investment decisions, as well as being effective in getting access to the most desirable funds.