Becoming a bit more private online is appealing to many of us after years of sharing (and in some cases, oversharing) every aspect of our lives. Now may be a good time to become a little more private in your investment portfolio as well. No, I’m not presuming that you plaster your investment positions all over social media and it’s time to stop. Rather, I mean reallocating some portion of a portfolio away from the public markets and into areas such as private equity or private debt.
Growth of the private financial markets has been unceasing for several decades, and they have more than tripled in size in the last 10 years. If the pace of activity from the first half of 2021 continues throughout the year, the industry could see deal values, exit values, and fundraising amounts all surpass $1 trillion for the first time.
The average private equity fund is now more than twice as large as just a few years ago, enabling funds to pursue larger businesses and keep those businesses’ shares out of public markets for even longer. This is most evident in the technology sector, with a sector weight of 35% across private equity markets but just 14% of the public markets. When considering the importance of technology to our economy and the growing representation in private market deals, it could be surmised that investors unable or unwilling to participate in private deals may forego investing in the innovative companies of tomorrow.
Mounting evidence suggests this shift may already be taking place: Since the mid-90’s the number of publicly traded stocks has declined from more than 8,000 to 5,300, with a disproportionate amount of the decline due to a reduction in the number of micro-cap stocks. During this time the average age of technology companies at the time of IPO has reached 12 years, a full four years later than was typical throughout the 2000’s. This likely means that more of the return to the highest returning companies is occurring in the private markets.
When it comes to performance, data from Pitchbook, a private market benchmark provider, reveals that private equity has consistently outperformed the public markets (as measured by public market equivalents). Top quartile funds have outperformed public markets by a significant margin, making manager selection of paramount importance when allocating to private market strategies.
At Johnson Financial Group we use multiple approaches to identify and partner with managers we believe can deliver superior performance. While still in its early stages, we’re encouraged at the prospect of enhancing portfolio returns through partnerships with high-quality managers. In addition to private equity, we are actively seeking private debt managers, which like private equity has grown tremendously, though starting from a lower level. Private debt funds have benefitted from their role as both an income solution in a low interest rate environment and a lower risk strategy relative to equity funds.
With valuation concerns in many parts of traditional markets creating uncertainty about future returns, investors are prudent to seek out additional ways to diversify portfolios. Private market strategies are just one of several approaches we encourage for implementation.
And please, if you found this of interest, don’t keep it a secret. Please be sure to share, retweet, or otherwise redistribute across all social media platforms.
ABOUT THE AUTHOR
VP Director of Alternative Strategies, CFA®, CAIA | Johnson Financial Group
In his role as VP Director of Alternative Strategies, Jon is responsible for conducting due diligence and selecting investment managers for use across the JFG platform. Jon’s areas of coverage include complementary investments and US growth equity managers. He leads the Complements Strategy Group, which oversees portfolio construction of complementary asset classes, and also serves as a member of the firm's Investment Committee.
