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
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”).