By Steven Brod - Bay Harbor Islands, FL - 06/17/2019

Ensuring your Clients’ Portfolios Benefits from Private Markets

The recent initial public offering of ride-sharing tech unicorn Uber on the New York Stock Exchange illustrates what can often be a harsh reality to digest.

The public debut of a unicorn – defined as a private company startup valued at over $1 billion – can be unexpectedly disappointing to public investors.

Most would agree that software and technology companies are transforming the world, and that many of these revolutionary enterprises are being backed in their earliest stages by private equity (PE) firms who can, in theory, potentially reap huge returns when the company goes public – that is, if it goes public.

On that note, investors often lose sight of the fact that many successful private companies stay private, foregoing the public markets altogether. In fact, according to data provider NAICS, 98% of businesses with $10 million or more in sales are private companies. There has recently been a profound shift in the economy resulting in productivity and economic growth flowing not from equipment or buildings, but from software, according to the WSJ. To catch this investment wave, many investors are increasingly inquiring about the private markets – specifically, about PE investments.

98% of businesses with $10 million or more in sales are private companies.

There is no getting around the fact that PE has become an established asset class. According to a 2019 McKinsey & Company study, PE’s net asset value has grown more than sevenfold since 2002, twice as fast as global public equities. The study reveals that U.S. PE-backed companies, totaling about 4,000 in 2006, have almost doubled by 2017. Meanwhile, U.S. publicly traded firms fell by 16% from 5,100 to 4,300 (and by 46% since 1996). As noted in the McKinsey study, even some large investors that had previously stayed away are now allocating to private markets, seeing them as inevitably necessary to gain diversified exposure to global growth.

There is a prevailing misconception that high-quality PE funds are hard to access, but the tides are changing, and an increasing number of independent financial advisors are turning to alternative investment platforms in order to attain exposure to private equity funds for their qualified clients’ portfolios.

In addition to providing access to high-performing growth companies, PE also offers other potential advantages for investors to consider. The first is performance. While there’s never a guarantee, many PE performance benchmarks beat the S&P 500 and Russell 3000 over the last one, three, five and ten-year periods.

Next, since PE-backed companies operate out of the eye of the public markets and are absolved of the necessity to report quarterly results, they are substantially unaffected from the volatility of public markets and liberated to pursue unique long-term growth strategies.

Finally, many PE firms are subject matter experts in the sectors in which they invest. Many firms have – by design - dedicated specialist teams or networks that contribute strategic and operational expertise to the companies they back.

Unicorns companies are rare, and hence the whimsical term. But for qualified investors, access to high-performing private companies is becoming increasingly common and fortunately no longer the exclusive domain of the institutional investment community.

- Steven Brod is the Chief Executive Officer of Crystal Capital Partners.