While the differences between the public market and the private market may seem obvious, there are lots of important distinctions to be aware of as an informed investor. Here is a breakdown of each, key areas where they differ, and how they’ve evolved over the last decade.
Many people are most familiar with the public market. On the public market, people can invest in publicly-traded companies by purchasing shares through a broker or, if a company offers it, investing directly via a direct stock purchase plan. Shares can be bought, sold, and traded on stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq.
Public stocks are considered a traditional asset class, and as such, generally, but not always, offer higher liquidity than private asset classes. As a part of the public market, these investments are subject to market volatility, though they are considered lower risk than private investments.
Publicly traded companies are traditionally larger, more mature companies. Because they are public, they must file certain reports with the Securities and Exchange Commission (SEC) in order to keep their shareholders and the markets informed on a regular basis and in a transparent manner. These reports are subject to SEC review and comment and cover things like financials, performance, revenue, and more. Generally, it is much easier to find information about public companies because they’re, well, public.
Changes within the Public Market
As the private market has evolved, (which we will dig into below), so has the public market. According to a report by McKinsey, over the last decade, public market assets under management (AUM) grew 100%, but the number of U.S. publicly traded companies stayed roughly the same. Further, that number has decreased by almost 40% since 2000.
The private market is made up of private companies who are seeking funding from investors in exchange for ownership in the company or, in the case of debt instruments, interest or a discounted conversion to equity at a later date. Unlike publicly traded companies, private companies are not subject to the same reporting requirements nor are they required to comment on performance the way public companies do. This can make it difficult to find information on them, such as dollars raised, company valuation, stock price, earnings, etc.
Unlike the more traditional publicly traded stocks and bonds, investments made in the private market are illiquid, meaning that investors should expect to hold onto them until an exit happens. While these private market investments may not experience the same volatility as the public market, the time horizon for a return is much longer. In some cases, private investments can offer higher long-term returns than traditional assets can alone; however, they come with much higher risk with no promise of reward or even return of the original investment amount. (If you’re interested in learning about private market fund performance, you can do so here.)
How the Private Market Has Evolved
The private market has grown significantly over the last decade. According to that same McKinsey report, private market AUM grew 10% in 2019 and $4 trillion in the last decade. Additionally, the number of active private equity firms has more than doubled, and the number of U.S. sponsor-backed companies has jumped 60% in the last decade.
Part of this shift can be attributed to the fact that many large, fast-growing companies are choosing to stay private. This is for a variety of reasons, including large private capital investments, less scrutiny, more flexibility, and private liquidity options, just to name a few. You can learn more about this private market shift and the potential benefits of pre-IPO investing here.
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.