Private Capital Offers Investors Another Path to Diversification

Private equity and private credit can be a positive, disruptive force in financial circles, and investors would be wise to include companies backed by these alternative funding sources in a diversified portfolio.

But unlike traditionally financed public companies, private capital is is generally more opaque, with fewer reporting requirements, which can make it difficult for potential investors to discover the actual risk in backing these companies.

Private capital has been a growing portion of institutional investment for years. Globally, private-capital funds—including private equity, private debt, venture capital, real estate, real assets, fund of funds and secondary funds—averaged annual commitments of $1.3 trillion over the past five years.

Compared to public-equity markets with about 3,500 American companies available to investors, private markets boast more than 17,000 companies with greater than $100 million of annual revenues in the United States. Pitchbook estimates that there are over 50,000 companies that have received venture backing, most of which are likely well below $100 million in revenues but potentially growing rapidly. Many of these companies are staying private for longer because capital is more widely available and the administrative burden and regulatory costs of going public are increasing.

For investors, private markets represent a broad asset class that can help diversify portfolios heavy on traditional assets. However, there are important considerations. These are illiquid markets and require a long-term view, often up to five to 10 years, or longer. Opportunities range from mature companies in private equity to startups in venture capital. Because these markets can be opaque, diligence on opportunities is more intensive, whether investing directly in companies or with specialized fund managers.