Investment Commentary

Becoming a bit more private with your investments

By Jonathan Henshue | Johnson Financial Group • September 29, 2021

3 minute read time

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.

2021-09-29 Investment commentary chart.png

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

Jonathan Henshue

Jonathan Henshue

AVP, Wealth Investment Analyst | Johnson Financial Group

In his role as an Investment Analyst, Jon is responsible for conducting due diligence and selecting third party investment managers for use across the Johnson Financial Group platform. Jon’s areas of coverage include US growth equity managers and complementary investments.

SUBSCRIBE

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security or investment. All information presented is considered accurate at the time of publication but no warranty of accuracy is given and no liability with respect to any error or omission is accepted. Charts and graphs, in and of themselves, should not be used as a basis for investment decisions. Past performance is not a guarantee of future results.

Complementary investments introduce risks that are different from more traditional investments and may require certain investor qualifications. These risks include more speculative strategies that may increase volatility and the risk of investment loss, illiquidity, lack of pricing or valuation information, complex tax structures and delays in distributing important tax information. Additionally, complementary investments often have more complex and higher fee structures than traditional investments. Higher fees reduce investor returns.

Johnson Financial Group is the parent company and brand name for its subsidiaries, Johnson Bank, Johnson Wealth Inc., and Johnson Insurance Services, LLC. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. Johnson Financial Group and its subsidiaries do not provide legal or tax advice.