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>> I'm Chris Wright, a cross-asset strategist in the Chief Investment Office
of UBS Wealth Management.
In this video, I want to answer three questions.
What are private market investments?
How do they differ from public markets?
And what are the benefits and
considerations from investing in private markets?
So, what are private market investments?
Let's take a simple example.
You give $10,000 to a friend to open a clothes store, and
in return they gave you a 10% equity stake in the company.
This would entitle you to a share of the profits, and
also any proceeds if the company was to be sold.
This would be called a private equity investment
because it's a private transaction between you and your friends, and
in return you receive equity in the company.
A professional private equity investors would tend to take this
relationship a step further and
take an active role in running the company, maybe sitting on the board of
directors to increase the likelihood that their investment increases in value.
And this is the most common type of private market investment.
Other types would include private loans.
So, using our same example, if you were to loan the money to your friend
to open the clothes store, you'd receive a specified rate of return
regardless of whether the company actually made a profit or not.
And another example could be physical assets.
This could be a property, a factory, some land, a machine perhaps.
And the strategy here would be to either renovate or improve the asset
to later sell it on at a profit, or to rent it out and receive an income.
So, how are these investments different from public market investments?
The key difference is that public companies are traded on exchanges
like the London and New York stock exchange.
And in order for a company to be traded on one of these public exchanges,
they must fulfill certain criteria, the most important of these being the need to
publicly disclose financial accounts and regularly report their earnings.
Another difference is the size and the stage of the companies.
Now, private companies can, of course, be any size.
But they do tend to be smaller companies that can't access financial markets.
Taking our clothes shop, for
example, your friend could not walk on to the floor of the London stock exchange,
give some hand signals, and sell their company to some traders.
Instead, if they needed to raise some investment, they would need to go out and
pursue that privately.
And so, what are the benefits and the considerations for
investing in private markets?
One of the main advantages of investing in private markets is the potential for
higher rates of return which results from investing in companies that tend to be at
an earlier stage of their development, or where their success is highly uncertain.
It is for this reason that exceptionally successful companies that go on to be
valued at over $1 billion are called unicorns.
They're very, very rare.
However, therein lies the biggest risk of investing in private markets,
that this uncertainty makes finding these winners far, far harder.
And it's for this reason that we strongly recommend that private market investors
don't commit all their capital to just a single investment, but
actually diversify by investing in a wide range of opportunities.
Another consideration that private market investors must make
is the lack of liquidity for their investments.
If, for example, you were to invest $10,000 in an S&P 500 company,
you could sell this back to the public market in a fraction of a second.
However, if you wanted to sell your $10,000 stake in your friend's clothes
store, it could take you weeks or even months to find another buyer.
Now, despite these risks, at UBS we strongly believe that private market
investments should have a place in portfolios for the simple reason that
they can offer a very different source of return to that found in public markets.
So, when considering a portfolio that already has some public equity and
bond investments, an allocation to private markets can increase the return of
a portfolio while at the same time lowering the overall level of risk.
I think you'll agree this is a very nice proposition.
Thank you.
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