Tapping into the private equity market

Longtime stock investors know that owning shares of publicly traded companies can be an attractive avenue for building wealth. Stocks have historically generated high returns, as investors have participated in the growth of earnings—and rising share prices—of the companies they own (of course, they also bear the risk and volatility of owning stocks). In addition, since public companies trade on exchanges, investors have enjoyed great liquidity and have also been able to build diversified portfolios of stocks, either by purchasing mutual funds and ETFs, or by directly buying the shares of individual companies.

Owning shares of private companies can also be a source of high returns, as the chart below clearly reveals. Moreover, as the chart below illustrates, private companies—as a group—have displayed less volatility than public equity markets (though any individual private company could have greater risk, as private companies are generally quite smaller than publicly traded companies):

Despite the attractive return potential, investing in private companies has been challenging, if not impossible, for most investors. One problem is that of access, as shares of private companies are not available for purchase on any public exchange. In addition, these investments typically lack liquidity, requiring investors to hold their shares for very long periods until the company goes public or is sold privately. Finally, the difficulty in buying shares of a single private company is magnified for anyone seeking to build a diversified private company portfolio.

Recently we have identified a way to tap into the private equity market with significant diversification, periodic liquidity, and skilled investment management. For clients eligible under federal securities rules, we have just initiated a position in a new fund that, early on, will focus on acquiring secondary private equity positions. “Secondaries” are portfolios of private companies that are purchased from existing primary investors in private companies, such as venture capital funds, private equity funds, or individual investors in those types of funds.

Secondaries are usually purchased at a meaningful discount to their underlying value. Primary investors provide the discount in order to attract secondary buyers in these otherwise illiquid companies. In this way, secondaries allow an investor to build a very diversified portfolio of private companies at compelling prices. The new fund on our platform owns a diversified portfolio of private companies and offers liquidity at fixed times during the year, thereby allowing investors to exit their positions in a much more liquid fashion than is typically the case.

To learn more about how we access this space for our clients, call us at 310-556-2502 or visit westmount.com/alternatives.