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Defining a New Idea: Active and Passive Investing in the Private Market

Defining a New Idea: Active and Passive Investing in the Private Market

Active and passive investing are common investment theologies in the public market, and a parallel approach can be taken in private market investing. While active and passive investing in the public and private markets have the same core of a hands on vs hands off approach, investing in private markets inherently takes a longer term view due to the illiquid nature of the private market. In this blog, we’ll discuss how active and passive investing can occur in the private market separately from the traditional definition.

Active and Passive Investing in the Public Market

Active investing involves a hands-on approach, where investors actively manage their portfolios, making frequent trades, and strategically adjusting positions. This approach typically aims to outperform the market through timing, in-depth analysis, and proactive decision-making.

On the other hand, passive investing involves a more hands-off approach. Investors build diversified portfolios that mirror a market index or a specific sector, aiming to replicate the market’s performance rather than actively outperform it. Passive investing can offer simplicity and lower management fees compared to active strategies.

Active and Passive Investing in the Private Market

While the public market allows investors to quickly enter and exit positions as market conditions change, the private markets have an inherently longer term view. The illiquid nature of private market investments can lead investors to hold on to their investments longer with limited exit opportunities. However, it is still possible for investors to use active and passive strategies when reviewing private market opportunities.

Active Investing 

When an investor determines which company to invest in and how much capital to invest, they are taking an active approach to private market investing. They are taking steps to help diversify their portfolio through various opportunities. Investors conduct their own due diligence, review a company’s traction metrics, team, and financials in order to determine if a company is the right fit for their portfolio. However, opportunities to exit their position are limited due to the illiquid nature of private market investments.

Passive Investing

Alternatively, investors may have the opportunity to invest in venture capital funds. These funds pool capital from groups of investors and distribute the capital across an assortment of private market investments. Venture capital funds are typically managed by professionals known as fund managers who implement the fund’s investing strategy, select the investment opportunities, and allocate the fund’s investment across multiple investment opportunities.

Investing in venture capital funds takes a more passive approach to private market investing. Typically, the fund is based on characteristics such as company stage or industry, and investors may or may not know which companies will be allocated a portion of fund assets. The fund manager conducts due diligence, selects the companies, and decides which company will receive which portion of allocated funds. Investors can typically access venture capital fund investments at lower investment minimums than investing in each company directly.

Final Thoughts

While active and passive investing are strategies more commonly used in the public market, the same core strategies can still apply to the private market. Seeking out investment opportunities, conducting thorough due diligence, and allocating capital can be seen as an active approach, while investing in venture capital funds in which a fund manager selects the companies and allocates capital can be seen as a passive approach. It is important to understand that active and passive investing in the private market is not a direct parallel to the topics typically discussed in the public market. All private market investments are inherently illiquid, and positions cannot be exiting as quickly as public markets.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.