When talking about private equity, an average retail investor usually doesn’t come to mind. Yet, an increasing number of these investors are looking to private equity to enhance the risk-return characteristics of their portfolios. Why?
Well for starters, the rise of listed private equity has increased investor accessibility to this asset class. Secondly, private equity is a gateway to a very different investment opportunity set. With private equity, investors can invest in companies with higher expected growth rates and returns and benefit from an added layer of potential diversification.
Investors aren’t the only ones captivated by the private equity story. For ten years and running, more and more U.S. companies have opted to go private and even delayed going public. Why is that the case?
Firstly, private companies are not subject to the whims associated with financial disclosures and short-term reporting requirements. Unlike public companies, they don’t have to deal with ensuing fluctuations in share prices (especially when their results fall short of analyst expectations).
Secondly, by not having to reveal too much about their business strategy, private companies have more anonymity, which betters their chances of gaining an upper hand over competitors.
While lower interest rates have facilitated raising capital since the financial crisis of 2008, changes in the regulatory framework have also fostered the appeal of this asset class. For example, regulatory changes* increasing the number of allowable shareholders in a company before a company is obligated to disclose results has encouraged more companies to stay private.
In the U.S., the number of companies backed by private sources of financing has exceeded those backed by public sources of financing.
As shown, private markets have really grown in popularity in comparison to public markets. However, due to the very few listed private equity vehicles available, this asset class still remains out of reach for most investors.
Fortunately, the few listed private equity solutions available have made investments in private equity more accessible than ever before. Not only are these solutions a great way to tap into the private equity space, but they are liquid, regulated and traded publicly!
*The passing of the 2012 Jobs Act in the U.S.
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