The Rise of Private Investments

cohdra

The private investment sphere has long been a traditional domain of private equity and venture capital firms. However, in recent years, many institutional and retail investors have increasingly taken an interest in investing in this exciting and promising sector. Many hedge funds are now running a hybrid model where they are investing not only in public markets but also late-stage startups. While this is happening, retail brokers are diversifying their portfolios by investing in small private companies. What is driving this recent phenomenon? Listed below are the key factors that help to shape a new ecosystem of the private investment market.

1. Startups are going public much later. With all the money flowing into the private sector, companies are going public at a much later stage than before. Take, for example, Amazon. When it went IPO in 1997, its market cap was $438 million. Today it is $202 billion, which is 460 times as high as the IPO price. Compare this to Alibaba: when it went public last year, its market cap was $155 billion. In order to make the same kind of return as Amazon, Alibaba has to grow to a company with a market cap of $71 trillion by 2032 – which is almost impossible. Because of the current trend, many investors are missing out, and therefore they have to invest in the private market in order to reap higher (potential) returns.
   
   
2. Globalization. It helps private investments to reach a broader audience. While seeking funding, companies do not need to be limited to their local markets. Thanks to the Internet, they can easily market themselves, raise funding and make financial transactions online. At the same time, investors are looking abroad to diversify their investment portfolios. The ease of making investments and raising funds globally is making private investments more popular than ever before.
   
   
3. Information transparency. Startups are not as ‘mysterious’ as they once were. Information on startups and private companies is now more transparent and can be readily found and attained. There are databases and analyses of different types of startups, venture capital firms and angel investors, etc. Not only has the abundance of information instilled greater confidence towards investing in private companies, but also makes it easier for investors to track their investments.
   
   
4. Syndication model. It has largely broadened the investor base. One investor can lead a deal, and many other investors who did not participate in the past can now follow the lead investor and back the deal.
   
   
5. Rich valuation. Lastly, valuations on private companies have reached the highest level in the past decade. There are currently 91 companies valued at $1 billion or more by VC firms, compared with just 56 years ago. Everyone is talking about chasing unicorns (e.g. the next Uber), which is pushing the valuations even higher. The higher these valuations become, the more investors want to invest.
   
   

The above five factors are largely driving the changes witnessed in the private investment market today. However, just like the public market, the sphere of private investments is not without its ups and downs.

Timothy Yang, Director of Business Development at DealIndex, says: “The push towards more information transparency, globalization and evolving private company structures mean that the fundamentals of the private market are constantly changing. It is certain that the rise of private investment is here to stay and will increasingly become more open to investors globally.”

Private investment no longer is just within the exclusive domain of traditional private equity and venture capital firms.

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This is an edited version of an article originally published at http://wp.me/p5mFcE-38 by DealIndex. You are free to re-edit and re-post it under Creative Commons Attribution 3.0 License terms by giving credit to the author with a link to www.startupcommons.org and the original post.