%20(1).png?width=600&height=338&name=menu_thumbnail%20(4)%20(1).png)
%201.svg){kind=small}
Joe discusses why private assets are operationally often superior to public ones, driving higher returns.
Key Takeaways
- Private markets have historically outperformed public markets. This has been true for the median private fund (in private credit, private equity, real estate, and venture capital) return and particularly for top quartile funds across those asset classes.
- One of the reasons private assets outperform is because they're often targeting investments at riskier stages in the company lifecycle, where talent is top-tier and well aligned with manager incentives.
- And when companies are private, C-Suite executives tend to have much more alignment with long term growth. Illiquidity can be a major benefit because they are no longer beholden to shareholder demands quarter-to-quarter.
- Additionally, fund managers have a lot of ability to add value to their investments by leveraging extensive networks, portfolio companies, restructuring, etc. to change the trajectory of the companies they own.
Transcript
I'm Joe Lonsdale. I'm the founder of Palantir, Addepar, Resilience Bio, and other technology companies. I also lead 8VC, which is a leading venture capital firm. We have about $6 billion in committed capital.
Private markets can very often outperform public markets, and there's a few reasons why. At a very high level, I like to think about it in terms of how hard is your money working and what's its backing. In private markets, you're very often backing top talent. It's working very, very hard, on a specific project. When you get to a big public company, there's just a lot going on and there's a lot of things you have to manage.
Private markets tend to back smaller, very focused groups that usually have found something that's broken or something that can be fixed, something it's very exciting, that's worth throwing tons of talent and working really intensely on kind of fix and grow over time. That can happen in the public markets. Even if it does, it's usually one of many, many things you're betting on when you're in a big public company, and it's just the most intense work that most interesting, positive ideas tend to be tied to the incentive of people who own a lot of them. And so when you have private markets, you have a smaller number of people who own a lot of something. They're pushing really hard. And so it just makes more sense how that tends to outperform over time, which is what the data shows the last 20 years.
One question is how could these private markets impact value in a way the C-suite can't? Should the C-suite be able to go and do this? And you know what? I'll tell you the very top of the C-suite and a lot of Fortune 500, we have very often steal them away and use them to work on our private equity and venture capital companies. Because when these people see something that's an amazing idea and they're really excited to work hard on it, it's going to be a huge change and an evolution of the economy. They love having real upside in that, and they can't get real upside in that big public companies. It's just from a pure incentive perspective, from a pure like, what does the best of the C-suite do when we're going to build Resilience Bio at 8VC, for example, like we steal away the guy who was CEO of Novavax and who was COO for Takeda in the pharmaceutical side and who helped build all these other big companies. They come and they work really hard. These new projects and then everything is aligned perfectly and they create them. And so there is a lot of value creation going on that is being taken advantage of in the private markets.
There's other reasons why private markets outperform. One is that funds have a really strong incentive to give unfair advantages to the projects they're working on. So a fund will have a big network and will be able to help make tens or hundreds of sales. They'll be able to help get these things going off the ground, so they really have momentum as well, and they'll be able to make the plans for what they're building for these things over a very long amount, again it takes sometimes five, six, seven years, at least to really build something right and really get the full plan where it's launched with all the right talents. With a public market company, it's very hard to plan ahead five, six, seven years. You may not be there. It's not clear you have real incentives that are going to be given to you based on what happens five or six years from now. Most your incentives are tied to the next quarter in the next year if you want to keep your job. So just a lot of reasons why the structure of private markets allows people to build things better.
Important disclosures
Opto Investment Management, LLC (the “Firm”) is a wholly-owned subsidiary of Opto Investments, Inc. and is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. This website is operated and maintained by Opto Investments, Inc. Certain products described herein and institutional relationships may involve investment advisory services provided by the Firm. This website is presented for financial institutions and investment professionals only and is not intended for individual consumers or retail investors, unless specifically noted. Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by the Firm or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from external, linked or independent sources, is believed to be reliable, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. We disclaim any responsibility for information, services or products found on linked websites. Images and photographs are included for the sole purpose of visually enhancing the website. None of them show current or former clients and should not be construed as an endorsement or testimonial. All investing is subject to risk, including loss of principal. Historical performance is not a guarantee of future performance and clients may experience different results. This information contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of the depicted investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting operations that could cause actual results to differ materially from projected results. See related disclosures at https://www.optoinvest.com/disclaimers.
