Investing in Public vs Private Markets

Public or private markets – which should you invest in? The answer for institutional and high net worth investors should be “both.” And yet, when faced with the option to diversify a portfolio with private market investments, many shy away—uncertain about what private markets really entail. In this post, we explain five core market characteristics and in what way they can often favor private market investors.

Volatility. Who hasn’t seen the wild ups and downs of the public markets? One could say that MSNBC has built its entire network counting on a cocktail of fear and greed to generate viewership. There’s frothiness in the public markets that comes and goes—one day it’s tech that supports remote work (hello pandemic stocks), and the next it’s AI-driven chatbots. Swings in one sector, or even one stock, are amplified across the public market. Correlation can be positive when markets rise, and brutal when they fall. Relatively frequent anxiety-producing swings have led savvy investors to seek less volatile options as part of their portfolios.

Private markets offer less volatility. Why? See our next two points.
Accessibility. With no minimums, no investor vetting, and share prices beginning at even less than $2, investors can click and a stock is theirs. This easy accessibility also means there’s a giant pool of investors with less conviction investing alongside you. Retail investing is subject to panics, with stocks fluctuating by 40% or more, though the value of the business itself hasn’t really changed. You are the company that you keep, and this low commitment company can cause high volatility.

With investment minimums starting at around $100,000, and a compliance-driven vetting process, the private investor base is a lot stickier. They’re more rational and more committed. Minimums help weed out investors who would fly away at a moment’s notice and won’t stick around.
Liquidity. The essence of public markets is the ability to buy and sell on demand. It’s a very attractive proposition knowing you can instantly buy a stock when you believe there’s an opportunity to be had, and to sell when that opportunity no longer seems as compelling or you need to free up some cash. But liquidity also causes volatility. When investors can sell at whim, it can lead to herd mentality that can dramatically move stock values.

Many investors are under the false impression that because there is a lack of liquidity, private market investments should be avoided. But it’s illiquidity that makes private markets less volatile. Private investors can’t act on emotion. Not only do they have to be more thoughtful in their decisions to buy given the higher investment minimums, they have to be equally thoughtful about selling. Lock-up periods and quarterly redemptions not only serve to prevent funds from being withdrawn on a moment’s notice, they force investors to think outside of the day-to-day tumult.
Information flow, broadscale. These days you can get information on the public markets immediately on your phone, or even your watch. That every investor has the same info creates efficiencies: all information is already priced into the asset. That’s a positive. The downside is that information efficiency also makes it harder to generate alpha.

The situation is quite different in the private markets. A lack of information flow enables asset managers to identify inefficient situations where they can generate alpha on a consistent basis. In the case of a bridge lender like Fairbridge, being in the private markets allows pricing every loan to its maximum opportunity.
Information flow, internal access. The other kind of information flow is direct with the company. Public companies are bound by strict protocols and layers upon layers of management. Even Warren Buffet is restricted in his contact and convos with, say, Apple’s Tim Cook.

In the private markets, investors have a direct line to the people making the investment or lending decisions. With a small fraction of the public stock audience, private market investors have the opportunity to ask questions during quarterly conference calls, and discuss a portfolio in-depth. And, in addition to distributing quarterly newsletters and monthly emails, managers that take an institutional approach keep their doors open to investors for in-office discussions.