The word “private” evokes notions of exclusivity, privilege, and even advantage. Indeed, investors seem to agree with this statement, according to Preqin. In its latest report titled Investor Outlook: Alternative Assets, Preqin revealed that no less than 63% of professional investors identified private equity as their most popular investment category.

In this article, we will take a look at how private markets differ from their public counterparts and examine the advantages and pitfalls each can offer the individual investor.

Private markets: A rapid growth

Worldwide assets under management in private markets reached USD 12.8 trillion in mid-2022. While this is surely a substantial figure, it pales in comparison to the world total of all assets under management, public and private, estimated at a staggering USD 98 trillion.*

* Estimates of assets under management vary widely, even among the authoritative commentators cited herein.

In line with the insights from the Preqin report, however, the total AUM in global private markets exhibited an impressive annual growth of 15% over the previous decade, being the fastest-growing segment among all the categories of assets under management, both public and private.

Global private markets assets under management by type (in USD trillion)
Source: Bain & Company

What has caused such popularity? In part, it comes from investors’ perception that private markets are less temperamental and volatile. Asset valuations occur during new funding rounds, which may only happen once a quarter or even once every 2 years, and are reported privately, quite unlike the moment-by-moment fluctuations in listed securities, all of which unfold under the bright lights of media commentary.

More fundamentally, it reflects the fact that private markets are the only way one can invest in new companies with promising new business plans or technologies that have yet to make their debut. Nowadays, should you be optimistic about the future of artificial intelligence or blockchain, for instance, you most likely have nothing but to wait until the pioneers of the field go public. This could entail not only waiting several years but also, quite possibly, a purchase price that is many times higher than what was initially paid by a venture capital (VC) fund or an institutional investor that backed one of these companies in its early stage.

No way out?

If one wishes to invest with a venture capital fund, he, however, must commit to it for at least 10 years, which is the standard life, or term, of private-market funds.

Should you require access to your funds during this period, you can seek a buyer in the secondary market. That said, even then, the sale will take some time, and the price will be at a significant discount to the fund’s asset value: as much as 30–40% is not unknown.

In contrast, in public markets, as the name suggests, you can buy or sell almost any amount of stock so long as the market is open (for SIX Swiss Exchange: from 9:00 a.m. to 5:20 p.m. with no lunch break). Unless your sale order is unusually large or represents shares in a rarely-traded company, you can expect to receive the full market price promptly.

How private markets work

The market life-cycle of a new company
Source: The Home Bankers’ Club

The diagram above effectively illustrates the nature of private markets, delineating the various stages leading up to an IPO (initial public offering). Let’s take a closer look.

1. Pre-seed

The initial phase, often referred to as the “pre-seed” stage, is usually the birth of an idea: online retailing, for example. This idea requires capital to progress into a commercially viable venture. Much like many entrepreneurs, Jeff Bezos started Amazon in a garage, warning his parents and other early investors that there was a “70% chance” they could lose their entire investment.

Pre-seed investment, which is fairly small – reportedly, Bezos’ family committed just USD 300’000 – aims to create the “proof of concept” or “minimum viable product.” This means reaching a stage where the product or idea possesses enough substance to undergo testing by consumers.

2. Seed

That being done, the entrepreneur might seek more substantial investments from seed investors, which may include venture capital funds. Although the sums involved are much greater than pre-seed capital, the risk is lower as the idea now carries a certain degree of commercial credibility.

It's worth noting that some commentators don’t distinguish between the seed and pre-seed stages. The venture capitalists, who represent third-party investors such as pension funds, however, are active in seeding; they are distinct from the “friend and family” insiders that typically invest in the pre-seed stage.

3. Series A, B, C, and so on

Following the first two stages, the newly established company may require additional capital to develop and expand its operations. Each round of capital-raising is designated as “A”, “B”, “C”, and so on. While a round “D” is usually rare, the trend of companies staying private for longer (with more than 6’500 IPOs between 1980 and 2000 vs. less than 3’000 between 2001 and 2022) may make its emergence more common.

From the company life-cycle diagram, it’s evident that, usually, each round raises a larger sum than its predecessor. This reflects not only the escalating capital requirements for what is becoming a much larger and more viable business but also the increase in its valuation.

From all this, it’s clear that although the sums being raised increase with each new stage, the risk declines as the business plan materializes. The degree of capital appreciation gradually moderates in tandem. Therefore, compared with the typical 100-fold gain that a series B round might generate for a company over pre-seed funding, the advancement achieved by an IPO is unlikely to be more than five times the B-round level. In turn, this could be as much as 500 times the initial pre-seed valuation.

Comparing risks and returns

As is almost always the case with investing, greater rewards can come from taking the greater risk of investing privately. The chart below reveals that private market asset classes have consistently outperformed their corresponding public market indexes over the past two decades.

Performance by asset class, 1-year pooled IRR for 2000–19 vintage funds (in %)
Source: McKinsey & Company

In 2022, all private market asset classes posted lower returns than in 2021 yet outperformed public equities, as reported by McKinsey. Private equity was the only asset class to generate negative performance, turning in a net IRR of −9.2% year to date. Nevertheless, private equity has been the best-performing private market asset class over the long run, with a 20.1% median net IRR to date for PE funds raised between 2009 and 2019 – a figure exceeding the top-quartile return of all other private asset classes.

Not only this, but the 2023 Swiss Pension Fund Study from Swisscanto reveals that the interest return on retirement assets for private-sector pension funds has outperformed that of public-sector pension funds over the last decade (see the chart below).

Interest return on retirement assets since 2013
Source: Swisscanto

In 2021, there has been the highest recorded average interest return of over 4% for private funds over the last 20 years. While returns for both private and public sectors have significantly fallen since then, the former is still outperforming the latter.

That said, as mentioned earlier, the share prices of listed stocks can be tracked continuously on any business day, whereas the share prices of private companies are valued no more than once a quarter and are not publicly disclosed (except in the context of press releases to actual investors).

Public stocks are also closely regulated, so the investor might have the reassurance of full recourse in law if their investment goes wrong because of malfeasance, fraud, or negligence on the part of a company’s management. In contrast, successfully pursuing such recourse in private markets is a much harder endeavor.

Additionally, there is a near-constant flow of information about public companies, including daily market commentaries, research from securities analysts, quarterly financial results, and significant developments such as changes in senior personnel.

Yet, such a massive flow of knowledge does not necessarily pose an advantage as one may succumb to what is known as the herd mentality bias, simply following the “crowd” without conducting his own independent research and ideas. This bias has historically led to many price bubbles, ultimately resulting in losses for many investors (e.g., the buzz around Dogecoin in 2021 when most investors flocked to it due to “fear of missing out”).

Embracing the risks

With all the aforementioned in mind, while there are no strict regulations and daily reporting in private markets, it’s precisely the risk stemming from the lack of public information that, at least in part, drives their greater investment returns.

All of which is well-known by professional investors, including pension scheme specialists, insurers, fund managers, and family offices, who dominate private markets. In contrast, retail investors, despite accounting for roughly half of all assets under management in public markets, represent just 16% of the private market landscape.

What’s even more remarkable is that public markets have been failing those investors as corporate share buy-backs and a dearth of new listings have drastically curtailed their choices. Partly in consequence – and contrary to what one might expect - the private markets are home to the overwhelming majority of larger US companies, with only 15% of them being publicly listed.

The share of US companies with more than USD 100 million in annual revenue at the private and public stages
Source: Bain & Company

The individual investor can only look on in frustration unless he has enough wealth to commit USD 250’000, or sometimes even a million or more, which is the typical minimum investment required for a private-market fund managed by a relatively unknown manager.

The Moonshot solution

One of Moonshot’s principal raisons d’être is to address this frustration. As a globally active, members-only network driven by our members, we join forces to access and structure the most sought-after deals within private equity, venture capital, real estate, and more for our members to access with as little as a CHF 10’000 one-off or CHF 500 monthly.

The approach we leverage gives our members sufficient knowledge about all the opportunities to invest with enough confidence while offering exceptionally lean structures – regulated by Swiss law – to keep overhead costs low further benefiting from a more attractive return.

Besides, should an investor require earlier liquidity, he can express interest in selling his securities to other investors from the Moonshot Circle through a bulletin board*.

* Please note that liquidity is neither provided nor guaranteed. Should match-making not be successful, investors can revise their offer and start the process from scratch (according to the product’s terms).

We believe that no one wants to just sit and watch the big cats lap up all the cream from private markets, and Moonshot is here to help you take your own place at this privileged table.

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