Get Onboard the Private Company Train
Not that long ago, the public exchanges introduced a revolutionary product; Exchange Traded Funds, known as ETFs. These baskets of sector or geographic or themed equity assets quickly gained investors favour as both a standalone investment and an important portfolio diversification tool.
These investment vehicles proliferated into the thousands and range from the fairly benign bond market up to Cannabis stocks. ETFs as popular, tradeable entities have become a significant portion of the mainstream investment universe.
History could well repeat itself with the recent opening up the ability for the general investing public to electronically purchase in Private Companies. Early indications show that Private Companies have yielded north of a 10% annual yield, beating the average of the public stock exchanges.
The private markets appear to be where significant growth is underway.
What is Private Equity?
The private equity market consists of stocks and/or debt in young or start-up companies that are not publicly traded, so not available on exchanges such as the TSX or CSX-V. You may be surprised to know, private equity is the largest asset class in the world.
The returns are based more on company performance and less influenced by stock market volatility. Important to note, these companies by definition are less liquid. Investors need to look at Private Equity as part of a longer investment period that can be 5 years or more.
The term has been the watchword for most successful investors over the years. It means something different to just about everyone. Diversification has proven, depending on the secondary market action, to mitigate risk to your capital.
Diversification mainly applies to portfolio structure based on your stated investment goals and objectives: short or long term, access to quick cash, age, life stage etc.,
- High liquidity investments, such as publicly traded stocks and bonds in case you need quick access to the money
- Medium liquidity investments, where you can access the cash in within several months such as real estate.
- Low liquidity; ‘set it and forget it’ assets, such as private equity where your capital is tied long term to the growth of the companies
I want in
Until recently, only the wealthiest 4% of Canadians or close friends and family of the company were able to buy Private Company equity or debt. How restrictive was the market? Even brothers-in-law were shut out. Also, sometimes, it is a higher minimum to be able to invest.
The real reason? Most investors fall into the 96%, not the 4%. An investor also has to be aware of the opportunity, which until now was more than difficult.
Digital technology has been a significant enabler in creating online marketplaces; look at Amazon or Shopify. Online funding and investment platforms, also referred to as equity crowdfunding, have emerged around the globe. In some countries, such as the UK and Australia, online investing in private companies already went mainstream.
Investments in early-stage private companies tend to lean to the high-risk end of the spectrum. ‘Angel’ (the 4%) investors usually invest in a portfolio of at least 10-20 companies.
Where Can I go to Purchase part of a Private Company?
Now, online private markets platforms, such as FrontFundr.com allow small investments starting at as low as $250. Investors can build their own private markets investment portfolio through self-directed investments. Alternatively, they can instruct your investment advisors to invest in private market opportunities on their behalf.
There are caveats for investing in private investments. Investments in typical private companies are, by nature long-term investments.
- is that they are illiquid;
- there is no public exchange where you can quickly sell your stock.
- many private markets investment opportunities are start-ups or scale-ups. It takes up to ten years (possibly sooner before your investment may be acquired or go public on an exchange (if they have not failed in the meantime)
Private Companies should appeal to the socially conscious as a number of these businesses are firmly in the ‘Change the World’ camp.
Investors can choose companies that meet their long-term goals as well as personal interests and beliefs. Truly, you can invest in causes that you support.
And who isn’t all about that?
McKinsey Global Private Markets Review 2019