Investors ignoring private markets may be missing out

With companies remaining private for longer, investors who overlook private markets may be missing out on a key way to create value, says Ana Puric, VP, investment specialist, CIBC Asset Management.

The median age for IPOs has increased from about six years in 1980, to 14 to 16 years today, she said in a March 17 interview. Further, the number of publicly listed companies has declined, with about 90% of global companies with revenues over $100 million listed as private.

“If you’re only investing in public markets, you’re effectively accessing just a fraction of the real economy,” she said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

There are several more reasons why private markets are becoming increasingly important for investor consideration, she said, including the fact that public markets are more concentrated, which reduces diversification. Also, passive investing and short-term pressures in public markets can distort pricing and limit long-term investment and innovation.

By contrast, she said, private markets offer deeper pools of capital, allowing companies to stay private longer. 

Most of today’s innovation and early value creation is happening outside of public markets, Puric said. “We’re seeing it with some of the private holdings, like a SpaceX, or an Anduril Industries. Public markets often capture these companies only after they’ve matured.”

Among the benefits of investing in private markets:

• Diversification. Due to inflation, the traditional 60/40 portfolio is coming under pressure, with equities and bonds becoming more correlated, declining sometimes at the same time.
• Private markets add new return drivers, with private equity relying more on operational improvements and strategic growth rather than market sentiment. This reduces dependence on public market beta.
• Private markets broaden opportunity sets, Puric said, helping capture the parts of the economy that are now private.
• They can improve long-term return potentials over longer time horizons, from 10 to 20 years. “We’ve actually seen private equity historically outperform public equities on an internal rate of return basis. That reflects both access to earlier growth, and benefits of active ownership.”
• They help limit exposure to public market risks. Private investments are less influenced by index concentration, momentum flows and daily volatility, she said.

Puric said they also offer portfolio level optionality.

“Venture capital, in particular, provides exposure to breakthrough innovation and potential for outsized returns, even if only a small number of investments succeed,” she said.

The main risk when investing in private markets is the illiquid nature of these strategies, Puric said. Some evergreen funds do offer liquidity, but it’s on a quarterly basis, typically 5% of NAV, or 2.5% for a venture evergreen fund.

With the dispersion of returns between top and bottom quartile managers widening, manager selection is key, as are understanding portfolio construction and clients’ risk appetite, she said.

“For investors, this isn’t just a tactical opportunity, it’s a strategic one,” Puric said. “Private equity and venture capital are no longer optional alternatives. They’re increasingly essential tools for accessing the full spectrum of global economic growth, enhancing diversification and building more resilient portfolios for the long term.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.