Exploring Private Market Investing
Key Takeaways
-
Real estate investing with Short Notes is an excellent way to diversify your investment portfolio.
-
Investing in Short Notes can provide increased portfolio stability, tax advantages, reduced correlation, and a hedge against inflation.
-
Investing in private debt and equity provides portfolio diversity and typically less volatility compared to public markets.
-
High-growth investment areas like venture capital and real estate private equity continue to drive the expansion of private market opportunities.
-
With low correlation to public market volatility, private investments can offer stability, inflation resistance, and unique tax advantages for investors.
Simply put, private market investments are not traded on public exchanges. The debt and equity instruments are called “private debt” and “private equity.” Less than 1% of U.S. companies are publicly traded, which means that the size of the private market and its opportunities are considerable.
We will answer the questions “What are private markets?” and “What are alternative investments?” by examining the private market and exploring key trends, risks, and some of the investment opportunities.
What Is Private Market Investing?
Private market investing occurs when investors direct their financial resources into the debt or equity of companies not listed on the stock exchange. As a result, the value of these companies increases, and investors are positioned to benefit.
The public market offers easy-to-trade stocks and bonds with high liquidity—investors can sell quickly and with little difficulty. However, this can also contribute to increased volatility. The public market is controlled by strict regulations, including the requirement that companies publish performance reports, which makes it easy for an investor to research each company.
The opposite is true for private markets. While there are regulations in place, they aren’t as stringent, and information can be considerably more difficult to access. The private market used to be strictly for accredited investors, but the SEC has made changes to its rules, which has opened up opportunities for non-accredited investors.
While the number of publicly traded companies declined from 8,000 in 2000 to just 3,700 in 2021, private market assets grew 170% in the past decade. The biggest attraction for the private market is new investment platforms that offer investors opportunities to invest and earn higher returns than traditional investments.
Several different types of private market investing that feature alternative investments include:
- Fund of Funds (FOF) - Pools investment capital into several investment funds instead of a single fund.
- Growth Equity - Investment in a company that is undergoing a significant transformation that has the potential for dramatic growth
- Leveraged Buyouts (LBOs) - One company’s acquisition of another company through the use of borrowed money.
- Mezzanine Capital - Type of loan that sits between less risky senior debt and higher risk equity and has the features of both.
- Real Estate Private Equity (REPE) - Capital raised from private investors to purchase and develop properties and then realize a return when they sell.
- Venture Capital - Money used for start-ups and small businesses with high growth potential.
Key Trends for Private Markets in 2025
Given the tremendous growth of private market investing, some key trends for 2025 are emerging that investors should be interested in.
According to S&P Global, private markets will reach beyond $15 trillion by 2025 and more than $18 trillion by 2027. This continues the growth of assets under management (AuM) in the private market, which were $7.4 trillion in 2020, $10 trillion in 2021, and $11.7 trillion in 2022. While the private market is predicted to grow more slowly in 2024, there will still be growth.
In 2021, PwC (PricewaterhouseCoopers) predicted the same forecast, saying that the AuM in private markets would increase $4.2 trillion to $5.5 trillion in the time up to 2025. That meant that the worst-case scenario during the post-pandemic economic recovery would be $13.7 trillion, and the best case would be $15 trillion.
Differences Between Private Market vs Public Market
Though less than 1% of American companies are public, the public market remains significantly larger than the private one in terms of value. The 2021 global equity markets’ value was $124 trillion, whereas the private market was $10 trillion.
On the other hand, alternative investments outperformed traditional ones because of the emergence of new asset classes. As a result, private markets grew at a faster rate than public ones.
The public market is affected by daily news and experiences volatility, often significant, as a result. Private market investments aren’t valued with the same frequency and don’t experience the same level of volatility.
Due to their illiquidity, private market investments are medium—to long-term, which means they ride out the storms that the public market can experience when investors panic sell and stock values crash.
Benefits of Private Market Investing Beyond Diversification
Diversifying a portfolio is a sound investment strategy that helps to strengthen it. Spreading resources across different asset classes means that all your eggs aren’t in one basket in times of volatility. Private market investing certainly helps to diversify a portfolio, but there are other benefits, and these include:
- Reduced Correlation - Historically, assets in the private market have demonstrated low or negative correlation compared to traditional bonds and equities. Private investments are long-term and have less frequent valuations, which insulates them from the fluctuations of a troubled public market.
- Increased Stability - Global events, news cycles, and investor behavior can all negatively affect the public market. The private market, however, is designed to protect investments during troubled times.
- Hedge Against Inflation and Rate Uncertainty - Unfortunately, investors have watched the value of their public portfolios erode when there is inflation and uncertainty about interest rates. However, investors who have directed some of their resources into the private market have discovered that their investments can weather pricing pressures. A solid example of this is real estate - as inflation rose, property values rose, as did rental income.
- Potential Tax Advantages - One example of private market investing is Real Estate Investment Trusts (REITs). These trusts own and finance different real estate types, and their distributions are tax-deferred until redemption because they are considered a return of capital (ROC). Investors who treat the rest of the distributions as ordinary income enjoy a 20% reduction in their tax rates.
The Bottom Line
Private market investing has unique attributes that can provide an anchor to a portfolio. Investors can rest in the idea that their investments can weather the storms the public market may be facing and that it has potential for growth even during those times.
In the past, only accredited investors roamed the hallways of private market investing because they had the financial ability to absorb any losses and they had the social and work connections to make deals outside of the public market.
The SEC’s Regulation A became a game-changer for non-accredited investors because it allowed companies to raise as much as $75 million in equity investment from the public without registering the offering. That meant that opportunities like crowdfunding for the everyday investor became a reality.
One such example is Connect Invest’s Short Notes, which enables any investor to earn passive income by investing in private real estate projects throughout the U.S. Our Short Note portfolio consists of a diverse selection of first-position, collateral-backed loans sourced from private borrowers that have been historically off-limits to retail investors.
Connect Invest has opened the door to this crucial alternative asset investment class with a minimum investment of just $500. The Short Notes offer terms ranging from 6 to 24 months, defined exit dates, good liquidity, and higher-than-average yields. They are part of a sound financial strategy to diversify and strengthen a financial portfolio.