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When public and private equity converge: An allocator’s guide

Cara Lafond, CFA, Multi-Asset Strategist
2022-12-30
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Key points

  • Changes in how private companies raise capital and when they go public should be reflected in asset allocation and portfolio construction decisions.
  • Analyzing the entire equity “ecosystem” is essential, as public and private companies will increasingly compete with one another.
  • Late-stage growth may be an attractive complement to buyout and early-stage venture capital investments.
  • Private capital is positioned in innovative sectors and geographies benefiting from structural megatrends.
  • Demand appears to be growing for private market exposures with a thematic focus (e.g., sustainability, dedicated sectors/regions).

The private equity market has experienced explosive growth in recent decades and appears poised for more in coming years. The market has also been reshaped by changes in how private companies fund their growth, which has altered the path to the public market. This evolution in market structure is, in my view, creating a more integrated “ecosystem” of public and private companies.

The implications of these changes are enormous, given the role that private equity has come to play in portfolios of institutional investors (e.g., a 20% allocation for the average large endowment1) as they face high return hurdles and seek to outperform public equity and pursue an illiquidity premium. With nearly half of investors planning to increase their private equity allocations,2 I believe the shifting market landscape requires a more holistic view of the equity opportunity set and a thoughtful approach to portfolio implementation.

In this paper, I’ll explain what’s driving change in the private markets and propose a set of portfolio-construction priorities, including ideas related to the late-stage growth category of the private market, thematic investing, and manager selection.

Trends transforming the private equity market

There are a number of fascinating developments taking place in equity markets and company life cycles, but let me focus on three in particular:

1. There are fewer public companies and more private companies

Since the mid-1990s, the number of exchange-listed US companies has been nearly halved, from just over 8,000 to roughly 4,200. We can see the impact across the…

To read more, please click the download link below.


1NACUBO, 2020; based on endowments greater than US$2 billion | 2Casey Quirk CIO Sentiment Survey, May 2021

Authored by
lafond cara
Cara Lafond, CFA
Multi-Asset Strategist
Boston

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