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Private market investments may help with portfolio diversification. Are they right for you?

By Beansprout • 20 Aug 2023 • 0 min read

Private market funds have grown in popularity amongst investors looking to diversify their investment portfolios. We analyse the pros and cons of private market investments, and share what you need to consider before investing in private market funds.

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This post was created in partnership with ADDX. All views and opinions expressed in this article are Beansprout's objective and professional opinions. 

What happened? 

If you are an investor in DBS’ or Apple’s shares, you would probably be familiar with investments in stocks that are publicly traded on stock exchanges like the Singapore Exchange or New York Stock Exchange.

What many may be less aware of, is that there are vehicles that allow investors to put their money into companies that have yet to go public as well. 

These are typically done through private market funds such as venture capital (VC) or private equity (PE) funds, which pool money together to invest in these early-stage businesses. 

In fact, the asset under management (AUM) of private equity funds grew by more than four-fold between 2000 and 2022 to reach $7.6 trillion, according to data compiled by S&P Global

Why are more investors putting their money into private markets rather than just buying stocks in public companies? 

Let’s dive deeper to understand the potential benefits and risks that come with private market investments. 

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What are the advantages of private market investments?

#1 – Potential for higher returns

One of the key advantages of private market investments is the potential for higher returns*. 

Investing in privately held companies, especially startups, allows investors to get in early when the company's valuation is still relatively low. If the company succeeds and experiences rapid growth, the value of the investment can skyrocket. 

While it may be challenging to compare the performance of private and public markets due to differences in liquidity and reporting requirements, there is some data to suggest that private market investments have historically performed better than public market investments. 

Research by investment manager Hamilton Lane of over 50,000 funds and more than US$16.9 trillion of private markets fund performance has shown that net returns from private equity funds have exceeded public equities over most of the past 20 years. 

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*Past performance is not a reflection of future returns

#2 – Longer time horizon

One of the reasons suggested for the outperformance of private market investments is due to the ability to invest over a longer time horizon. 

Unlike publicly traded stocks that can experience significant price fluctuations in the short term, private investments are not subject to the same daily market pressures. 

This longer time horizon allows the companies to focus on long-term growth strategies without being overly concerned about meeting quarterly expectations. 

As a result, management teams of private companies may have more freedom to execute their business plans and create value over time.

#3 – Diversification of investment portfolio

The other reason why private market investments have grown in popularity is due to the diversification benefits for an investment portfolio. 

Due to the low correlation between the performance of private market and public market assets, it is suggested that investors can spread their risk across various asset classes. 

This diversification can then help to mitigate the impact of market volatility and economic downturns. 

What are the risks of private market investments?

Private market investments can potentially be more risky compared to investing in well-established publicly traded companies. 

Also, private market investments are typically not as liquid as public market investments, and there may be less disclosure that is available. We discuss these risks in more detail below. 

#1 – Private market investments are typically not as liquid as public market investments

One important factor to keep in mind is that private market investments are not as liquid as public market investments. 

When you buy a stock on the stock exchange, you can easily sell it whenever you want. But in the private market, it may not be as straightforward. 

It can take years for a startup to grow and eventually go public or be acquired by a larger company. As such, your funds may be locked in for some time before you are able to unlock the potential returns from your investment. 

#2 – Limited transparency and information

Publicly traded companies are required to disclose a significant amount of financial and operational information, making it easier for investors to conduct due diligence and make informed decisions. 

In contrast, private companies have fewer reporting requirements and operate with greater confidentiality. 

As a private market investor, you may have limited access to the company's financial data and may rely heavily on the information provided by the company and its management. 

This lack of transparency can make it more challenging to assess the company's true financial health and performance accurately.

How to evaluate a private market fund?

Given the risks of investing in private market funds, we need to make sure that we perform our due diligence properly before putting our money into them.

Some of the key factors we’d consider include the track record of the fund manager, the fund strategy, as well as the fees incurred. 

#1 - Track record of fund manager

It is important to examine the fund manager’s track record and past performance by examining the historical returns of previous funds managed by the same team. The historical returns can also be compared to relevant benchmarks as well as industry peers. 

In this case, we would be looking out for a fund manager who has been able to demonstrate a consistent track record of successful investments. 

We can also evaluate the expertise and experience of the fund's management team, including their backgrounds, industry knowledge, and whether they have a successful track record in managing similar types of investments. Generally, a skilled and experienced team is more likely to make well-informed investment decisions.

#2 – Fund strategy

After assessing the fund manager, we would seek to understand the fund's investment strategy and focus. 

As private market funds can adopt numerous investment strategies, we would need to determine what types of companies or assets the fund aims to invest in. This can include early-stage startups, growth-stage companies, distressed assets, or specific industries. 

We would then assess whether the fund's strategy aligns with our investment objectives and risk tolerance.

#3 – Fees

The headline fees are generally higher in private markets compared to other asset classes. 

For example, management fees for private equity funds can average 1.5% - 2% of the committed capital per annum. Fund managers also typically earn a performance fee of 20% of realised profit should the returns of the fund exceed a minimum threshold. 

As such, we would review the fund's fee structure and expenses carefully, and ensure that the fees are fair and transparent as they can potentially impact the net returns earned.

How accredited investors can gain access to private markets

Despite the potential diversification benefits that private market investments can offer investors, access to such opportunities may be limited in the past. 

ADDX is among a few Singapore-based platforms offering private market securities, including global funds, real estate investment trusts, structured products and pre-IPO shares in fractions as low as $5,000. 

The team at ADDX has a screening process for good investment opportunities that leverages on their investment experience and industry network. 

The platform is regulated by the Monetary Authority of Singapore (MAS), and is open to all non-US individual accredited investors. 

If you are an accredited investor and keen to get access to the ADDX platform, you can receive US$150 worth of trading credits when you sign up here or via using the referral code BEANSPROUT. 

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Important Disclaimers

ADDX is open to non-US individual accredited, corporate accredited, and institutional investors only.   

The information herein is for general information purposes only and does not purport to be comprehensive or contain all the information that you may need or desire and has not been independently verified. This article does not constitute a recommendation, an offer to sell, or a solicitation to invest in any capital markets products in any jurisdiction and its content is not prescribed by securities laws. Neither this article nor anything contained herein shall form the basis of any contract or commitment whatsoever, and should not form the basis of any investment decision and should not be considered as advice or recommendation by ADDX to acquire any capital markets products. This information herein is not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject ADDX to any registration or licensing requirement in such jurisdiction or country.

Alternative investments in the private market are speculative and involve a high degree of risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Investors who cannot afford to lose their entire investment should not invest. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

You should carefully consider whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources, investment eligibility and relevant circumstances. You are advised to exercise caution, read and understand the contents of this article, and obtain all necessary professional advice, before investing.

The information and analysis shared here is from Beansprout and not ADDX. ADDX does not accept any responsibility for, nor makes any representation, warranty or undertaking, express or implied, as to the truthfulness, accuracy, completeness, fairness or reasonableness of any information supplied in this article. ADDX shall not have any responsibility or liability (direct, indirect, consequential or otherwise) for the information contained in, or any omissions from, this article. Information may be subject to change without notice. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.

This article was first published on 20 August 2023 .

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