Here’s A Look At The Pros And Cons Of Investing In Private Capital Markets
Author : ADDX Services | Published On : 12 Jan 2022
Private capital markets allow you to invest in financial assets that are not listed in the public domain, like equities of private companies, private debts, real estate, etc. These financial markets are used to efficiently diversify one’s investment portfolio by making use of the unique opportunities it has to provide.
However, there are always two sides to a coin and as an investor, you should be aware of both. To help with the same, here’s a look at the pros and cons of investing in Private Capital Markets -
What are the advantages of investing in private capital markets?
1) They are less volatile
The price valuations of the various financial assets listed in private capital markets do not fluctuate on a daily basis like their public counterparts and hence, are less volatile. This makes investing in private capital markets an excellent way for investors to reduce their portfolio’s exposure to risk. They are also very company and industry-specific, which means that their price valuations do not fluctuate even on the basis of emotions like fear and greed but only change when there has been a development with regards to the company or the related industry.
2) They are best suited for long term investments
Since private markets are less volatile, they also take a relatively long time to reach their point of maturity. While people who invest in public markets are typically more focused on short-term returns, a private market investor is looking for massive long-term earnings. There are also many private market investment strategies that do not work/provide desirable returns in a short period of time.
3) They help you efficiently diversify your portfolio
Private Capital Markets give you access to a whole new range of investment opportunities. From investing in unicorn startups to established private companies, hedge funds, REITs, etc., private markets give you the opportunity to diversify your portfolio with precision, and that too at a relatively lower risk!
What should one be careful about when investing in private capital markets?
1) Private capital markets are not accessible to everyone
The majority of the private market financial assets are only accessible to accredited investors. Hence, the private capital market is not very democratic and the final price of the bought financial asset depends on the negotiations between the buyer and seller instead of market forces.
2) Private markets are relatively expensive
Making even an entry-level investment in private markets typically requires millions to billions of dollars. To give you more clarity, when you buy the equity of a publicly listed company, you essentially buy a piece of the company but have little to no control over how the company functions. However, when investing in private companies, depending on the type of contract you have with the organization, you can even have a seat at the board of directors and might have a say in the way the said company operates.
We hope this article enlightens you about the pros and cons of investing in private capital markets.