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Unlike public stock exchanges, which offer daily trading, strict regulatory disclosure, and high liquidity, private markets are less transparent, have lower liquidity, and require long-term commitments. They also have less oversight and are generally considered riskier. With that in mind, many savvy investors wonder whether it’s time for them to invest in the private market. It can be worthwhile for these reasons:
Higher Returns Potential
Once you’ve established the distinctions between accredited investor and qualified purchaser and established your financial capacity to engage with the risks of private investments, you may enjoy higher returns.
Private companies tend to be earlier in their growth stages than public companies. If you invest in an early-stage company before it becomes widely known and it grows significantly, your returns can be much higher.
WhatsApp is a great success story as a Venture Capital-backed company. The company’s only venture investor, Sequoia Capital, turned $60 million into $3 billion when Facebook bought WhatsApp for approximately $19 billion.
Many investors had been skeptical about investing in WhatsApp because it only charged $1 per year and had no ads. However, Sequoia Capital believed in massive user growth, a simple product, and strong founders. They invested $8 million in 2011, $52 million more in 2013, and made their return upon the company’s sale when they owned around 15-20% of the company at acquisition.
Less Daily Market Volatility
As a public stock investor, you generally keep tabs on what your investments are doing every day. They are prone to change moment to moment, driven by news and market emotions. Most changes occur within milliseconds between 9.30am and 4pm EST in the US, but volatility continues in pre-market and after-hours trading.
Private investments are more about playing the long game. Once you invest, you must sit and wait for the magic to happen. Private investments aren’t traded daily and don’t fluctuate in price every minute. As a result, your investment can feel more stable, even though risk still exists.
One of the least volatile private market investments is core private infrastructure, such as toll roads, airports, and data communication networks. They provide stable cash flows through contracts and regular demand. As they aren’t actively traded on public exchanges, there are fewer valuation swings.
Diversification
There’s no denying that the private market is risky. That’s why you must be a qualified purchaser or accredited investor to make certain investments through various platforms. Standards include a minimum annual income and net worth, professional certifications, and knowledgeable employees or investment managers.
However, in the same way that you can spread your risk across multiple investment types in the public market, you can do the same in the private market. You can invest in startups, private real estate, private credit, and infrastructure projects. The risk varies across all investment types, which helps investors diversify their portfolios and avoid concentrating their exposure in a single asset or strategy.
Exclusive Opportunities
Startups can offer thousands of percents in returns, but the risks are very high at the seed stage.You can miss out on a lot of early growth if you wait until a company goes public before you invest (see how to build a 100 year old company). In today’s market, many high-growth companies are staying private for longer. Rather than raising capital in public markets, they raise capital through private funding rounds from private equity and venture capital investors.
As a result, much of the early growth occurs while the company is still private, including rapid scaling, market dominance, and revenue expansion. If you invest in such companies early on, you can expand your opportunity set, increase potential return sources, and diversify your portfolio.
You may be surprised by how many companies have chosen to remain private for longer. Stripe is one of the most valuable fintech firms and was private for over a decade. They wanted to avoid short-term scrutiny of public markets and focus on their product development and long-term infrastructure. SpaceX also raised billions of dollars in private funding and achieved major technological milestones, all while not listing on a public exchange.
There are undoubtedly many things to be mindful of before investing your hard-earned money, but the private market is bound to pique your curiosity. As an eligible qualified purchaser or accredited investor, you may access exclusive opportunities, higher return potential, and numerous diversification options. Green Prophet does not endorse investing in any company without using an SEC-compliant, accredited investor.
