Private Markets VS Public Market: Difference and Examples
What are the differences between Private Market VS Public Market?
Generally, there are two types of markets: the listed (public) market and the unlisted (private) market. These markets enable investors to invest their capital for returns, and companies to raise capital.
However, the two markets function differently. A public market allows all types of investors to buy publicly traded securities. In the private market, investments are only accessible by a small group of insiders including institutional investors and ultra-high-net-worth individuals. In other words, it's a market for investments that are not publicly traded on an exchange.
Not like public equities (stocks), the private market is less liquid due to the lack of market transparency. This article gives a detailed overview and comparison of the public and private investment market.
What are Private Markets ?
The private market is investment s in assets and equities that are not traded in a public exchange or stock exchange market. In the private markets , fast-growing companies that are not publicly traded give professional investors equity in exchange for the funding and mentoring they need to grow. These investors usually limited to institutional investors like venture capital firms, private equity firms, solvegien funds and ultra-high-net-worth individuals. With the massive ticket size and lack of market information, the general public have very limited access to the investments in this space.
Assets owned in the private market are not listed or traded and they include private equity , private venture capital , private credit , buyout funds, private REITs , Pre-IPO placements, etc
The key characteristics of private markets are
- The flexibility of private companies with fewer regulations
- Investors are paid through distributions
- Funds are in the form of Investment profits and management fees.
- Provide no performance report and financial information to the public
2-and-20 Fee Structure
Investors in private market funds commonly pay by a 2-and-20 fee structure – “20” refers to 20% of the profits generated by investments made by the firm. And often “2” refers to the 2% Management fee. Investors are paid through distributions and the details are in an Offering Memorandum or PPM that outlines the terms of securities offered to investors and other structuring details.
What are Public Markets?
A public market is where securities are listed or traded on the stock exchange. To offer this security in the market, they must first conduct an Initial Public Offering (IPO) launch. To maintain public market security, the market is strictly required to regularly disclose its financial and performance report to shareholders and government entities.
The price of shares is determined by the number of shares offered for sale and the stock of shares requested by buyers, while its liquidity is based on demand and supply and varies amongst companies. The largest shareholder in a public company owns 50% of the shares and reserves voting rights in the operations of the company.
Assets owned and traded in a public market are mainly stocks and bonds, while other investments such as ETFs, Mutual Funds, and Real Estate Investment Trusts (REIT), are also available.
The key characteristics of a public market are
- Shareholders are paid through the stock accumulation
- The highest shareholder holds 50% of the shares.
- Regulated to provide full disclosure of finance and performance to the public.
Differences Between Private Market VS Public Mar ket in Investor Perspective
Let's x-ray the difference between the public and public market based on these key points.
Returns
The liquidity risk brings high returns to the private market . This means that Investors interested in private equity or other investment alternatives should prepare for the higher returns that come with lower liquidity.
Liquidity
Public markets are known to be highly liquid, and recently, with the rise of many digital platforms, liquidity has increased significantly. In contrast, the private market has always been illiquid. Although, the market is beginning to gain some liquidity with the growth of the secondary markets, especially LPs and GPS.
Volatility
The public market has higher volatility as the price is determined by the extensive amount of trading activities by public investors. As such, the stock price could be overvalued or undervalued due to market sentiment and many other factors, this poses risks to investor in evaluating the stock price and potential yield. While private market is not publicly traded, the volatility is considerably lower than public market.
Information Transparency
Information dissemination is limited in a private market as it comes with no obligation to disclose information like the public market. The public market gives full disclosure of its performance and finances to investors.
Differences between Private Market Vs Public Mar ket in Company Perspective
Ownership
The equity of a private company is usually held by a small group of company members, institutional and individual shareholders. Which enable a company to remain in a highly active ownership approach, with greater focus on value creation through operational improvement.
While a publicly listed company is owned and controlled by shareholders who buy and sell securities. As the stock can be traded publicly, the ownership dilution makes most public companies difficult to effect change to company operations.
Financing
Public companies can issue new shares to the public or utlise debt for company expansion. Although private companies might face higher cost of debt acquision and has no ability to raise fund from public investors, the rise of private market is bringing m ore private wealth and funding opportunities to private companies.
Sustainability
The longer owning of stocks by private companies poises a long-term sustainability strategy. The company can be directly encouraged by shareholders or bondholders to execute strategies that could create value over the long term.
The Market Size of Private Market VS Public Mar ket
Private equity net asset val ue growth outpaced total market cap of listed companies by more than 8 times since 2000.
In contrast to a decreasing number of companies getting listed, private market growth has been accelerating. Private market growth is being driven by strong investor demand coupled with a significant increase in supply. The number of global unicorn companies (private companies valued at $1B+) has been soaring and the list has reached 1,000 unicorns for the first time in February 2022.
It is important to note that both the public and private markets have benefits and drawbacks for companies and investors. The public market is easy to access with daily liquidity yet higher volatility, while private markets come with less liquidity but at the same time lower volatility. As the private market is growing rapidly, it is getting more attention from ultra-high-net-worth individuals, private markets investment has a growing significance to the portfolio of many UHNWI in the world.
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