What are private market investments?
Private market investments are capital investments that are not publicly traded on an exchange. There is a market for the whole capital structure, ranging from secured debt to equity in private companies. Private market investments differ from publicly traded securities in the following respects:
- Access to investment opportunities
- Availability of information
- Number of investment opportunities
The advantages of private market investments
Private market investments have grown to be an integral part of the portfolios of institutional and professional investors, as they offer advantages in the following areas:
Over the past few decades, private market investments have outperformed publicly traded securities in terms of equity and debt. This is justified by the liquidity premium and the exploitation of market inefficiencies, leading to significant growth in the asset class in recent years. Source: Preqin
The bulk of the economy consists of private market investments, since the majority of companies and other financial investments such as real estate are not traded on the stock exchange. The asset class therefore offers access to a wide range of alternative sources of risk and return. For example, companies in the growth phase are typically not traded on a stock exchange and are therefore not part of a traditional portfolio. Private equity funds make it possible to include such investments in an allocation. The synchronisation (correlation) with public markets is often quite low and can therefore eliminate unsystematic risk in any portfolio.
Private versus public markets
In the current ultra low interest environment, public debt markets offer return-free risk. For the major currencies, the entire benchmark yield curve is either in negative territory or very low. For professional investors looking for instruments with fixed-income characteristics, private debt can be a valuable alternative.
On the equity side, companies tend to stay in private ownership for longer. The average company age at the time of an IPO has increased from six to eleven years in the past decade. At the same time, the average IPO valuation has increased significantly. This suggests that a larger share of the value creation during the lifetime of a company takes place while the company is held privately. As such, investors who only invest in public market equity are missing out on an attractive premium.
Challenges in accessing Private markets
As attractive as private market investments are, it can be difficult for investors to gain access to them. Market participants often face a number of challenges during the investment process, including:
Custody accounts / assets under management
For an investor to even be considered eligible to get full access to private market deals, banks typically require a custody account and a large amount of assets booked with the bank.
Non-transparent fee structures
With most banking products in private markets, clients face multiple fee layers, meaning collective and direct private market deals can involve substantial additional costs.
Inflexibility of standardised products
Private market investments are often offered as a predefined, conditional package. This means the investor has to buy the whole package to receive the desired product.
Minimum size per deal
Typically, the minimum investment amounts in private markets are sizeable, which is a restrictive element for many investors.
For professional investors, VP Client Solutions offers curated, modular access to private market products and structuring services without the typical entry barriers such as a custody account at VP Bank or minimum assets under management.
We provide access to a broad range of products, combining in-house expertise with carefully selected partner offerings. This guarantees full optionality and the best solutions for all ORBIT ecosystem participants.
The above information does not constitute a personal recommendation to buy, hold or sell private market investments, nor does it constitute legal, financial, accounting or tax advice, or any form of personal advice. Private market investments may be unsuitable depending on an investor’s investment objective, time horizon, risk tolerance, risk capacity, and financial and individual circumstances, as well as due to sales restrictions associated with private market investments. This information is therefore no substitute for individual advice from an expert or for studying the product-specific documents (e.g. prospectus, information memorandum, shareholders’ agreement, term sheet, subscription agreement, etc.).
Private market investments are special, non-standardised forms of investment that are not intended for a wide audience, and are associated with additional risks (e.g. liquidity, settlement, advance performance and business risk of the issuer) that may result in the total loss of the amount invested. Furthermore, they are intended only for investors with sufficient experience, knowledge and expertise to qualify as a “professional client” within the meaning of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments (MiFID).