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Robert Picard sheds light on why and how private markets are different and add unique value
Key Takeaways
- For many people, the immediate and wide availability of information in public markets has engendered a day-trading mindset. The illiquidity of private markets may provide some balance, necessitating longer-term thinking among investors.
- Private markets allow investors to tap into a large segment of the US economy - the 87% of US companies with revenue exceeding $100M - not available for investment through public markets.
- Manager selection is key to successful private markets investing. Information is scarcer than in public markets, and it takes experience and expertise to be able to perform proper due diligence.
Transcript
My name is Robert Picard. I head up private market solutions at Hightower Advisors. Hightower is a community of 135 separate advisor businesses and wealth management firms spread across the United States in approximately 34 different states.
Private markets provide a lot of value to a portfolio. First of all, there's an emphasis on the risk-adjusted return performance. We now have information that on a three-year, five-year, ten-year, or 30-year basis, private markets tend to outperform with improved and enhanced risk-adjusted returns compared to public equity and public fixed income portfolios or a traditional 60/40 portfolio. That's one piece.
The other piece is these are long-term investments, and, you know, we all notice that today with public markets, your handheld device allows you to trade automatically or instantaneously. We see CNBC every day, the countdown before the opening bell. We've all been moving more towards a quick day-trading type mentality. I think it's really critical to have a much longer-term investment horizon. It's good for our economy, it's good for corporate America, and it's good that we're not chasing a quarterly return.
That's one piece. The second is, as I alluded to earlier, the benefits are risk-adjusted returns, three-year, five-year, ten-year, or 30-year. We have better risk-adjusted returns with private markets added to your portfolio. Then the last piece is really diversification.
Right now, approximately of all the companies in the United States that generate more than $100 million in revenue, 87% of those companies are privately owned. They're founder-led. And to a certain way, you want to get exposure. That's at the foundation of the US economy and some of the best-performing companies in our country. And it'd be great to participate in that ecosystem in our economy. And that's really one of the benefits of the diversification that private markets provide.
Now, those are some of the benefits. At the same time, we have to talk about some of the risks. First, risk: it's not transparent. And really, when you're looking at public equity and public fixed income, all the information is available. Clearly, on the private market side, it's not transparent. There's unregulated investments. Very often, you're investing with private companies that are still founder-led. So that requires additional investment, due diligence, and deep operational due diligence reviews.
Therefore, you really need, and I can't emphasize this enough, clients and our advisor businesses insist upon having a seasoned team of professionals to basically research and evaluate these companies to make sure that you're choosing the best companies to invest with and the best fund managers. Then lastly, one of the risks is simply illiquidity. Now, on one hand, long-term investments are good for your portfolio. You're not day trading. On the other hand, that illiquidity you need to be rewarded for that illiquidity with improved risk-adjusted returns. And that's really critical. And one of the benefits to be rewarded with that for that illiquidity.
Endnotes
- Data on % of companies with revenue >$100M, from Capital IQ, as of February 2021
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