Private vs. Public Markets: What Investors Should Know

Check any financial news website, and you’ll likely see a list of quotes for major investment assets: domestic stocks, international stocks, government bonds, and more. These ‘public market’ assets tend to draw the most attention. However, they’re not the only type of investment available. 

‘Private market’ assets are less visible, higher risk and more challenging to access, but they can offer compelling opportunities for certain sophisticated and high net worth investors. In this article, we’ll explore the difference between public and private markets, looking at the role each can play in a portfolio. 

Key Takeaways:

• Public markets carry assets that nearly everyone can invest in. These markets feature low transaction costs, ample investor information, and strong regulatory protection.
• Private markets carry assets that are more challenging to invest in, often due to regulatory restrictions or investment minimums. Private markets tend to be less liquid, more opaque, higher risk and come with reduced oversight from regulators.
• Despite their unique challenges and risks, when included in a diversified portfolio, private market assets can be a powerful tool for sophisticated and high net worth investors in their wider arsenal.
• Accessing private markets is not as simple as accessing public markets. Private market asset classes vary significantly, and manager selection can have a strong impact on realised returns. 

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It’s important to note that the content of this article is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information. Private market assets are high-risk investments that may be illiquid and long term in nature. These are high-risk investments, available to eligible sophisticated and high-net-worth investors only. You could lose all of the money you invest.

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Public markets: Liquid, transparent, and highly regulated

Broadly speaking, public markets reflect investment assets that nearly everyone can participate in. These markets are highly accessible, with few regulatory restrictions on who is allowed to invest. In addition to this accessibility, public markets are characterised by several other common elements:

• Liquid – Public markets are generally highly liquid, meaning that it’s generally easy to trade in and out of assets. This liquidity tends to result in straightforward pricing and low trading costs. 
• Transparent – Public market investors can usually access ample information about the assets they’re investing in. This transparency can include financial statements, risk disclosures, and ongoing management commentary. 
• Highly Regulated – Regulatory authorities tend to keep a close eye on public markets, enforcing rules that protect investors and promote fair trading. As a result, these markets can be suitable for a wider range of investors.

For companies, accessing the public markets typically isn’t cheap or easy. While requirements vary by jurisdiction, public market firms and funds generally need to undergo a formal registration process, as well as provide ongoing reporting to investors. But in return, these companies can access a massive pool of capital – global public equity markets alone are worth over $100 trillion. 

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Private markets: Illiquid, opaque, and lightly regulated

In comparison to public markets, private markets are harder for investors to access. This inaccessibility is often the result of regulatory restrictions, such as the sophisticated and high-net-worth investor requirements in the UK. Moreover, private markets are typically:

• Illiquid – Selling a private market asset, such as shares in a startup, can often require bespoke negotiation and pricing. Similarly, private market funds typically have long lock-up periods.
• Opaque – In private markets, investors rarely have access to the same quality of information as they do in public markets. Generally, private market firms and funds can disclose as much – or as little – information as they’d like.
• Lightly Regulated – While it would be a mistake to say that private markets aren’t regulated, the law does tend to offer fewer investor protections in this space. Regulators generally expect that private market investors are better able to assess their own risks.

In some cases, the distinction between public and private assets may not be obvious at first glance. In credit markets, for instance, even bonds that are considered public can face regulatory restrictions on who can invest. In recent years, the packaging of private assets into public funds has also blurred the lines between these markets.

Nonetheless, asset classes like private equity, private credit, and venture capital all sit firmly under the private markets umbrella. And despite their potential drawbacks, private assets can be worth considering for many investors.

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Why consider investing in private markets?

Compared to public markets, private markets tend to come with less information and fewer investor protections. Moreover, it can be challenging for investors to easily liquidate their positions, resulting in longer holding periods. Although it’s important to weigh these factors carefully, the benefits of investing in private markets can still overcome any drawbacks:

• Potential for higher returns – Because private market investors take on unique risks, they can generally expect to earn higher returns over the long term. Importantly, higher returns in private markets are not guaranteed and past performance is not a reliable indicator of future returns. But in recent years, a diversified portfolio of private market assets generated an annualised return 5% higher than a comparable public market portfolio. 
• Increased diversification – Many private market assets are imperfectly correlated to public markets, especially alternative asset classes like infrastructure and real estate. This can offer increased diversification within a portfolio, potentially generating strong returns even when public markets underperform. 
• Reduced volatility – Because private market assets don’t trade on exchanges, they are less susceptible to technical factors that can sometimes distort public market prices. Instead, private assets are valued on a fundamental basis, which has helped contribute to lower historical volatility.

For investors, balancing the trade-offs of private assets is paramount. For individuals with high ongoing cash needs, the illiquidity of private markets may not be suitable. Similarly, for those who prefer greater levels of transparency, navigating the information asymmetries of private markets can be challenging.

However, the portfolio-enhancing potential of private market assets should not be overlooked. When it comes to building a robust portfolio with a strong capacity to generate wealth, private market assets can be a valuable tool.

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Conclusion: Accessing private markets

For investors who have decided to take the leap into private markets, the next question becomes how to integrate them within a portfolio. The answer will vary sharply depending on an investor’s individual situation. For some, a small allocation to private credit and private equity can make sense. For others, larger positions in alternative asset classes might be compelling.

In either case, investing in private markets is not as straightforward as public ones. In public markets, the popularity of index funds means that the difference between high- and low-performing funds tends to be quite narrow. But the role of manager selection is far more important in private markets, and can meaningfully impact realised returns. 

These factors make research, due diligence, and continuing education key for private market investors. While the unique challenges of private markets shouldn't be underestimated, neither should their potential to transform a portfolio's risk-return profile. For investors willing to accept the trade-offs, private assets can be a powerful tool in the wider arsenal for long-term wealth creation.

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Notices

Investing puts your capital at risk. The value of investments can go down as well as up, and you may get back less than you put in. Sidekick’s Private Markets products are only available to individuals in the UK who self-certify as either High Net Worth or Sophisticated Investors. These are high-risk investments that may be illiquid and long term in nature. You could lose all of the money you invest. If you're unsure whether an investment is right for you, it’s best to speak to a qualified financial adviser.

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