As financial advisors in Cupertino, CA, Everest strives to provide guidance and education on wealth management matters. We hope this article sheds some light on your questions and concerns. 

Privately held companies that are not listed in a public exchange represent a significant part of the global economy today. These range from small businesses to globally recognized brands like Bose and Subway; 87% (1) of U.S. companies with revenue of $100 million are privately held. These companies contribute to innovation and job creation, and play a vital role in our day-to-day lives. 

Similar to their public counterparts, private companies need investment capital to grow. They raise capital via debt or equity form of financing from banks or private market financial firms. These financial firms in turn raise capital from investors and invest in the private companies. The investments are typically categorized as private real estate, private equity, private credit, infrastructure, or venture capital, depending on factors such as financing structure, stage of the company, or sector. These investment categories each offer its own risk-return tradeoffs. Viewed from the perspective of an investor, the investor participates in funds raised by private financial firms. The funds then invest in companies, which results in investment returns flowing back to the investor.

Some Benefits Offered by Private Market Funds

  • Portfolio diversification: Including private market funds in a portfolio can diversify risk and enhance overall returns. Private assets tend to have a low correlation with public markets, meaning their performance may not be directly tied to stock market movements. This lack of correlation can help smooth out portfolio returns and reduce overall volatility.
  • Additional returns: One of the primary sources of additional returns in private market funds is the “illiquidity premium.” These typically have limited liquidity compared to publicly traded investments. Akin to a longer-term CD versus a short-term one, investors are compensated for accepting this illiquidity risk. 
  • Lower volatility: Private market funds often exhibit lower price volatility compared to the public markets. Since private assets are not subject to daily market fluctuations and investor sentiment swings, their valuations are typically less sensitive to short-term market noise. This lower volatility can contribute to more stable and predictable returns over time.

Some Risk to Consider While Investing in Private Markets 

  • Lack of liquidity: As mentioned earlier, the illiquid nature of private market funds can be a double-edged sword. While it offers the potential for higher returns, it also means investors may face challenges in accessing their funds quickly, especially during times of financial distress. Many funds offer quarterly liquidity, but at times, it may take 12-18 months to get capital back.
  • Regulatory oversight: Private market funds have less stringent regulatory oversight compared to publicly traded assets. This lack of oversight could lead to information asymmetry, making it challenging for investors to fully understand the risks associated with their investments.
  • Valuation risk: Private assets are not continuously priced like publicly traded securities, leading to valuation uncertainties. The true value of such an investment may not be clear until it is eventually sold or a major event occurs, making it difficult to assess the investment’s performance accurately.
  • Manager risk: In private funds, the success of the investment heavily depends on the skills and decision-making of the fund manager. Unlike publicly traded index funds, there is a huge dispersion of returns between the top-quartile and the bottom-quartile manager, so picking the right manager is key to better investment outcomes.

What Asset Classes Merit Attention in Private Markets?

  • Private credit: These are loans that both private and public companies take from financial operators. Rather than borrow from a bank, where there can be uncertainty and delays in execution, companies are willing to borrow at higher rates of interest. Investors in private credit are in turn compensated in the form of higher returns. 
  • Private real estate: A vast majority of real estate in America is privately held. This not only includes residential real estate, but commercial real estate like apartment complexes, industrial warehouses, office, and retail. Real estate firms raise funds from investors to buy, build, improve, and thereby deliver an attractive return to investors by way of rental income from and capital appreciation of the properties held. 
  • Private equity: In the past, household brand names like Yahoo have chosen to go private using financing from private asset managers, which helps them improve business with a long-term focus rather than deal with short-term pressures from Wall Street and also benefit from better governance available to them. Companies then either do an IPO or become part of a larger firm through an M&A transaction. Large private asset managers finance these transitions using investors’ capital and deliver capital appreciation when the liquidity event happens. 
  • Venture capital: Early-stage companies use equity financing in the form of venture capital (VC) to grow. Since a majority of such companies fail but a small set achieve spectacular success, picking the right individual company can be tricky. By investing in a VC fund and investment manager, through the secondary markets, it is possible to lower risk while at the same time achieve higher returns.

Why Now?

In the past, private market investments were mostly accessible to institutional investors like pension funds, insurance companies, and endowments. High minimums, operational complexity of drawdown structures, and resources needed for due diligence limited their usage. Recently, there has been a democratization in accessibility of private asset managers to qualified purchasers ($5M net worth) and accredited ($1M net worth) clients of RIA firms. Product design, easier access with lower minimums, and investor-friendly structures are now available. Regulatory changes like the availability of interval funds and simplified tax reporting via 1099 forms have also helped make investing in private markets more broadly feasible today. 

The Bottom Line 

Private market investments play a significant role in the economy by facilitating capital formation, supporting innovation, and providing alternative sources of financing for businesses. Including private markets in an investment portfolio can offer diversification benefits, additional returns through the illiquidity premium, and potentially lower volatility. However, investors must be aware of the unique risks associated with private markets, such as illiquidity, reduced regulatory oversight, valuation uncertainties, and manager risk. As with any investment, thorough due diligence and a clear understanding of individual risk tolerance are essential, and it is best to work with an investment professional who can assist assessing the suitability and getting access to the right investment. 

If you have any questions about private market investments, or your overall financial plan, we at Everest Management Corp would love to help. Schedule an introductory, no-obligation meeting by contacting us at 408-502-6015 or emc@everest-mgmt.com.

About Ranga

Ranga Srinivasan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. After graduating from the University of Cincinnati in the field of engineering, Ranga, witnessed the dot-com collapse in the early 2000s and sought to manage his own personal finances. He realized that many of the options available were unsatisfactory for a myriad of reasons. Knowing it could be done better, Everest was founded in 2007 to provide comprehensive wealth management. Ranga and the Everest team are dedicated to caring for the financial needs of the families they serve. With an emphasis on building trust and holding to the fiduciary standard of putting clients first, Ranga strives to offer financial solutions that inspire confidence. 

In his free time, Ranga is passionate about staying active; you can often find him swimming, golfing, biking, and playing tennis. He also has a great love for charity and philanthropy work. To learn more about Ranga, connect with him on LinkedIn.

About Ramprasad

Ramprasad Satagopan is co-founder and principal at Everest Management Corp., an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. As a self-made, highly educated first-generation immigrant, Ramprasad became passionate about investing after witnessing the dot-com collapse in the early 2000s. He created Everest to help his peer engineering community to build household wealth in a systematic way. Everest has grown over the years while staying true to its fiduciary commitment. Ramprasad and the Everest team take pride in being a firm that brings a reputable, honest, and caring approach to all its clients.

Ramprasad graduated from both the University of Cincinnati and the University of Phoenix with a master’s degree in science and business administration, respectively. When he’s not helping families build a strong financial future, Ramprasad can be found enjoying traveling and reading. To learn more about Ramprasad, connect with him on LinkedIn.

About Everest Management Corp

Everest Management Corp is an SEC-registered wealth advisory firm based in Silicon Valley and serving clients across the United States. After witnessing the financial struggles of many families in the early 2000s dot com collapse and struggling to find first-rate financial guidance themselves, Ranga Srinivasan and Ramprasad Satagopan founded Everest Management Corp in 2007; their goal was to help clients grow household wealth using a systematic investment process with uncompromising integrity. The Everest Management team is known for their hyper-personalized service tailored to the unique needs of each family and their commitment to providing skilled and trustworthy financial advice to engineers and other professionals. To learn more about what it’s like to work with Everest Management Corp, visit https://everest-mgmt.com/. 

Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These views may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Everest Management Corp. strategies are disclosed in the publicly available Form ADV Part 2A. 

Everest Management Corp. is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Everest Management Corp. and its representatives are properly licensed or exempt from licensure.

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(1) Per Capital IQ, as of January 2022