More Attention to Private Markets
Private market investing activity has been growing for years across asset types. This is partially a logical reaction to the regulatory and investing landscape. It also looks like an overheated market.
Investors can now buy private company stock on AngelList, EquityZen or Forge. They can buy a slice of a Picasso or Banksy on Masterworks.io. There are plentiful crowdfunding platforms for private loans and real estate deals. There now exists a platform for purchasing partial ownership in baseball cards.
This massive growth is partially explained by regulatory changes supporting private markets with better tax benefits and expanded crowd funding rules. Inflation has helped by effectively lowering the net worth and income hurdles to qualify as an Accredited Investor, a definition that allows one to participate more broadly in private markets.
The same time period has not been so kind to public markets. Regulations stemming from the dot com bubble, Enron and the real estate collapse have brought the cost of going and staying public higher. The implications of failing to meet public company regulatory guidelines increased this past September when companies with deficient public disclosures were effectively barred from active trading. Approximately 2,000 erstwhile-public companies were affected.
Meanwhile humungous amounts of capital have made it easier for companies to stay private. The acceptance by endowments and pension funds of venture capital as an investable asset class has led to an explosion in venture funding. Add massive growth in private equity capital and many companies now have financing options to stay private longer.
The composition of money managers has diverged in private and public markets, leading some to worry about negative selection bias in companies that do choose to go public. These concerns stem from the public market prevalence of index funds that buy everything and blank check companies that must deploy hundreds of millions of dollars or return the funds to investors.
That has led some investors to think private markets skew towards better opportunities.
Some recent experience supports this notion.
For example, Bay Area companies such as Uber and Lyft still trade below private market valuations years after going public. The vast majority of companies that recently went public via blank check mergers (also known as backdoor IPOS) now trade well below their initial price.
For all their differences, there is one common element of growth in private and public markets: the individual retail investor. But the track record of retail investors brings a Marty Zweig quote to mind: “The markets will always do whatever they have to do to screw over as many people as possible.”
Be cautious if you consider joining the masses.
David Born can be reached at dborn@pfmpartner.com.
