Let’s Talk Private Investments Pt.2: Why consider private investments?
The second piece in our Let’s Talk Private Investments series answers the question of why investors should consider private investments. It’s a natural place to begin private investment education. For investors to dedicate the time and energy to learn about these complicated investments, they must first understand why they’re valuable. Read on for three key benefits of private investments, and check out our first article for a refresher on why we’re evolving our scope.
Reason One: Access more market innovation
For decades, investors could access a comprehensive set of the world’s most innovative ideas through stocks available to the public. However, the number of public companies has decreased from roughly 6,000 in the mid-nineties to about 4,000. This trend stems from fewer companies going public through the initial public offering (IPO) process, as indicated by the number of IPOs falling by about 61% between the 90s and 2000s. As a result, those who invest primarily in public companies have lost access to a subset of innovative economic ideas.
This subset is highly valuable, which makes their inaccessibility alarming. The number of unicorns – defined as a private company with a $1 billion or higher valuation – has increased from 39 in 2013 to an estimated 900 in 2021. The ultrawealthy 1% is the primary population that can access these unicorns, which has alarmed prominent financial figures. “The potential lasting effects of such an outcome to the economy and society are, in two words, not good,” says SEC Chairman Jay Clayton. Given this concern, one of the main reasons investors should consider private investments is to broaden their access to financial and technological innovations.
Reason Two: Earn higher investment returns
Investing in more innovative businesses can come with the benefit of higher returns, as indicated by private equity significantly outperforming public investments. Research from McKinsey shows that private equity has earned a 9.9% annualized return over the S&P 500’s 6.4% return over a twenty-year period. If someone invested $100 for the full 20 years in both investments, they would earn $660 from the private investment versus $345 from the public investment.
Private equity isn’t the only type of private investment that has performed well. Over twenty years, the research indicates that private debt investments have returned 8.7%, and infrastructure has returned 7.5%. real estate has returned 9.3%, and that figure is just the median return. Some REITs have even performed much higher.
Reason Three: Protect against inflation and volatility
Private investments can offer other benefits beyond return such as inflation protection. For instance, commercial real estate asset classes like mobility hubs have special long-term contracts that allow them to raise rent prices with inflation. Other investments like private debt offer floating interest rates, which means the recurring interest payments paid out by bonds adjust to inflation. As recent years have reminded us, inflation can skyrocket after long periods of lulls, so it’s critical that someone chooses investments that can protect against inflation at a moment’s notice.
Private investments can also offer stability during turbulent economic environments. For instance, private commercial real estate offers strong stability given that REITs must pass along 90% of their taxable income to investors, and a portfolio of real estate can offer stability through investing in various asset classes of commercial real estate.
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Future articles in this series will dive into the various aspects of private investments. Email us at invest@noyackcapital.com if you have any specific questions related to private investments.