Why is it worth looking at private capital markets, namely Venture Capital and Private Equity, and adding them to your portfolio
The private market is a collective term for a whole range of investment opportunities that are not traded on public markets and exchanges. Typically, it is classically defined as Venture Capital, Private Equity, Real Estate, Infrastructure, Natural Resources, and Private Debt.
Venture Capital (VC) and Private Equity (PE) is a type of financing that investors provide to startup companies and businesses that are believed to have long-term growth potential. Institutional and retail investors provide the capital for PE&VC managers, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and bolster and solidify a balance sheet. The two instruments differ in the level of risk, stage of investment, and complexity of deal structure – VC is more aimed at young, fast-growing companies, while PE can even participate in the buyout of a public company from the market (Graph 1)
The primary reason we focus on the private market is that investors have little reason to like 2022. This year brought us market upheaval, geopolitical instability, and economic conditions that few could have anticipated. But short-term uncertainty provides an excellent foundation for long-term goals, and private markets could be a major contributor to growth in the coming years, thanks to sustained global trends such as the transition to a low-carbon economy, broader adoption of technology, and new demographic shifts.
A new era of higher inflation, rates, and volatility has sapped public markets, creating opportunities for private markets. At the moment, we see valuations in private markets declining, not only due to general market stress but also due to a growing supply of secondary stocks by investors who need liquidity. These occurrences create an excellent entry point, and the additional weighting of private assets in the portfolio provides help in the diversification.
As Blackrock emphasizes in its 2023 outlook: Beyond the potential benefits of diversification and reduced volatility, private equity has historically performed better on a risk-adjusted
basis than other equity strategies. The best periods often follow recessions, and in times of crisis, private equity (incl. VC) tends to outperform public equities by a larger alpha.