Public vs Private Equity

When most people think of investing, their minds go straight to the stock market. Public equity—shares of companies traded on exchanges like the New York Stock Exchange or Nasdaq—is familiar to most investors. Whether investing in individual stocks, mutual funds, or ETFs, you participate in public equity. But what about private equity, the exclusive and often overlooked other half of the equation that ordinary investors rarely get to explore?

In this article, we’ll explore the differences between public and private equity, why access to private equity remains limited for many, and why this area of investing is worth attention, especially for those who want to explore opportunities beyond the familiar public markets.

What Is Public Equity?

Public equity refers to shares of companies that are traded on public stock exchanges. These companies must provide regular financial disclosures, making their performance relatively transparent and easy to track. Public equities are also liquid, meaning you can buy and sell shares quickly and with minimal transaction costs.

Most individual investors have exposure to public equity in their portfolios through mutual funds, exchange-traded funds (ETFs), or direct stock investments. This widespread accessibility is one reason public markets are such a popular investment vehicle.

What Is Private Equity?

Private equity, on the other hand, refers to ownership in companies that are not publicly listed or traded. These companies might be small startups, family-owned businesses, or large corporations that choose to remain private for various reasons. Access to private equity usually involves:

• Buying shares in private companies directly.
• Investing in private equity funds.
• Taking ownership stakes in startups and growth companies.

Private equity investments tend to have a longer time horizon, higher minimum investment requirements, and are typically less liquid, meaning they can’t be easily bought or sold. However, private equity offers unique and exciting opportunities to invest in parts of the economy that are often less crowded and overlooked by traditional investors.

Why Most Investors Don’t Have Access to Private Equity

There are several reasons why most ordinary investors don’t invest in private equity:

Regulation: Private equity investments are usually available only to accredited or sophisticated investors, which means you must meet certain financial thresholds (such as having a net worth of at least $1 million or a high income). This regulatory hurdle keeps many everyday investors out.

Minimum Investment Size: Many private equity funds or direct investments require large sums of money to get started, often $100,000 or more. This high barrier to entry further limits who can participate.

Liquidity: Private equity investments are not easily bought or sold. You may need to commit your money for several years before seeing a return, which can be a drawback for those seeking more liquid and flexible investments.

Complexity: Investing in private companies is often seen as more complex than investing in public equities. It requires deep due diligence, experience, and an understanding of less transparent sectors than public companies.

The Concentration Risk in Public Equity Markets

One issue with public equity is that most individual investors invest in a similar basket of stocks through their retirement funds and other investment vehicles. The largest global public companies, like Apple, Microsoft, and Amazon, dominate the market and form a significant part of most equity portfolios. As a result, there’s a risk of over-concentration in a few sectors, such as technology, with limited diversification.

The Untapped Opportunity in Private Equity

Here’s the exciting part: about 50% of the world’s economy is derived from non-listed companies. That means half of the global economy is largely off-limits to investors who only focus on public markets. Private equity offers a unique opportunity to tap into this massive part of the economy.

Think of companies that provide essential services, groundbreaking innovation, or niche expertise—they may be thriving but remain out of sight of the public stock exchanges. These businesses often have greater growth potential because they aren’t weighed down by the same regulatory constraints and public scrutiny that can limit public companies.

Why Wealth Managers Avoid Private Equity

Many wealth managers shy away from private equity for various reasons:

Lack of Understanding: Private equity requires skills and knowledge that are different from public equity. Many wealth managers are more comfortable with public stocks’ transparent and liquid nature.

Company Mandates: Large financial firms often have strict guidelines requiring them to invest in listed and liquid assets. Private equity doesn’t meet these criteria, so many wealth managers won’t even consider it.

Risk and Reward: Wealth managers may perceive private equity as riskier due to its illiquid nature, longer investment horizons, and the need for specialized knowledge. However, the potential rewards can be significant for those willing to take the time to learn and explore.

Expanding Your Investment Horizons

While public equity offers liquidity, transparency, and broad accessibility, it’s not the only option for investors looking to build and protect their wealth. Though more challenging to access, the private equity space offers a world of opportunities in sectors and businesses that are often more dynamic and less crowded than public markets.

For expats and other global investors, exploring private equity investments can be a powerful way to diversify portfolios, take advantage of global growth opportunities, and invest in areas often underrepresented in traditional investment strategies.

How to Get Started in Private Equity

So, how do you begin to explore private equity?

Start Small: Many new platforms allow smaller investors to access private companies via equity crowdfunding or fractional ownership. This is a great way to get your feet wet without a massive financial commitment.

Private Equity Funds: Accredited investors can consider private equity funds, which pool money to invest in private companies. Experienced professionals manage these funds and offer diversification across various private assets.

Networking: If you have the resources and risk tolerance, networking with entrepreneurs, business owners, and private equity firms can open doors to unique investment opportunities.

Educate Yourself: The private equity market is complex. Learn from experts, read books, and follow industry news to get a feel for this investment landscape.

Summary

Public equity will always be a staple in most investors’ portfolios, but it’s essential to realize that it represents only a portion of the global economy. Private equity offers untapped opportunities, especially for those willing to navigate its complexities. While access can be challenging, the potential rewards make it a space worth exploring—especially for investors looking for more than the usual public market offerings.

Expanding your horizons and learning where to look could unlock new ways to grow and protect your wealth.