Private market investing refers to investing in assets that are not publicly traded on exchanges, such as private equity, private debt, venture capital, etc. Compared to public markets, private markets are less liquid, less transparent, and have higher risks as well as returns. There are various approaches to private market investment – directly into companies and assets, indirectly through funds, or co-investing alongside other investors. This article will provide an introductory guideline to private market investing, including its characteristics, major categories, risks and returns, and fee structures.
Main categories of private market investment
The major categories of private market investment include: 1) Private equity – acquiring ownership stakes in private companies or taking public companies private through leveraged buyouts; 2) Private debt – lending to private companies not through public markets; 3) Venture capital – investing in startups and early stage companies; 4) Natural resources – investments in commodities, timberland, farmland etc.; 5) Real estate – commercial and residential properties; 6) Infrastructure – roads, airports, utilities etc. Each has its own risk-return characteristics.
Approaches to private market investment
There are three main approaches to private market investing: 1) Invest directly into private companies and assets; 2) Invest indirectly through private equity, venture capital or other alternative investment funds; 3) Co-invest alongside fund managers as limited partners, which allows lower fees but higher risks.
Risks and returns of private market investment
Compared to public market investments, private markets typically have higher returns, but also higher risks. They tend to have volatile returns with fat-tailed distributions. Restrictions on redemptions also lower liquidity. However, they provide diversification as returns have low correlations with public markets.
Fee structures of private market funds
Private market funds charge both management fees based on assets under management or committed capital, as well as performance or incentive fees based on investment profits. They also utilize terms such as hurdle rates, high water marks, catch up clauses, and clawback provisions.
In summary, private market investing provides access to alternative assets not publicly traded, with distinct risk-return characteristics. Key categories include private equity, debt, venture capital and real assets. Approaches involve direct, indirect through funds, and co-investments. Performance fees and liquidity restrictions differentiate them from traditional investments.