Can Money Be Made In Private Market Investing
One of my colleagues from my days as CFO Global Private Banking at RBC, Colin Carlton, who arguably is the pre-eminent public market investment manager search and monitoring professional in Canada, described the difference between investing in public markets as opposed to investing privately:
“Investments can take the form of publicly traded (“Public”), or Non-Publicly traded (“Private”) securities. The primary difference between the two is the element of liquidity. Liquidity while not certainty, provides the opportunity for an investment to be sold more frequently, allowing for a more certain realization of either gains or losses than Private investments. On the other hand, for that liquidity:
- A significant premium is placed on investments that are Public, taking away an element of profit potential on such an investment, and;
- Volatility is created by an emotional component characteristic of Public Investments.
Many Private investments, while not guaranteed and not liquid during, can have a clear time horizon which is less than 5 years. They also have a significantly reduced emotional component to their values.”
Well said. Some may argue that disclosure and transparency are also important favorable components of public market investments. I would argue that, even with the new rules that have been imposed since Enron, Tyco, MCIWorldCom, and Arthur Anderson, they are far from achieving a level of transparency that is effective, which interestingly enough, properly structured, can be readily available from Private Investments.
So, that being said, if you can:
- avoid the public market premium and keep it for yourself;
- have real transparency; and
- avoid or even perhaps capitalize on the emotional component of the public markets
why not invest privately?
Ultra Wealthy people have been doing this for years, contributing to the cliché “money makes money”. Participating in private investments, properly structured, monitored, and with a clear route to liquidity, can be investments without the premium, emotional roller coaster, and lack of transparency attributable to public ones. The table reflected to the left shows current returns from various types of investments, with the clear leader being private market investments.
I am not saying to avoid public markets, what I am saying is we should all consider private opportunities. If you have a time horizon of 5 years or more (which you should by the way) they can provide the opportunity for more predictable higher returns than their public counterparts, and contribute materially to your growth in net-worth.