Is Now a Good Time to Invest in Private Companies?
With the dynamic shifts in the global economy and technological advancements, investing in private companies is becoming an increasingly attractive option for many investors. Now might be a favorable time to consider this investment avenue.
Impact of Valuation Collapse
An essential factor to consider in the current investment climate for private companies is the significant reduction in valuations since 2021. On average, valuations have collapsed by 50% due to interest rate hikes and changes in market sentiment. This devaluation presents a potential opportunity for investors seeking reduced-price entry points.
A prime example of the current value of private stocks is Epic Games.
Epic Games raised $2 billion in additional funding in early 2022 when Sony and Kirkbi each invested $1 billion into the company to fund building a metaverse for kids. That latest funding round gave the company a valuation of $31.5 billion, rivaling other publicly traded game makers.
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Publicly traded companies are higher
In addition to the significant reduction in valuations, the private market still trails the publicly traded market by 30%. This gap signifies a potential opportunity for investors to explore different investment horizons and risk profiles. While the private market may present unique challenges and risks, the current discrepancy between private and public valuations could appeal to those looking to diversify their portfolio or seek alternative growth opportunities. Investors must, however, carefully assess individual opportunities in line with their investment strategies and risk tolerance.
An example of this price dynamic and spread between private and public companies is offered by
Instacart and Doordash. The latter is publicly traded and has returned 8.5% YTD, while Instacart's valuation is down 60% in the same period.
Diversification Opportunities
Investing in private companies provides a unique opportunity to diversify your investment portfolio. Unlike public companies, private investments aren't as directly impacted by market volatility. This can offer a buffer against broader market fluctuations, contributing to a more resilient investment strategy.
Access to Innovation
Private companies, especially startups and growth-stage companies, are often at the forefront of innovation. Investing in these companies provides an opportunity to capitalize on groundbreaking technologies, products, or services with the potential for significant growth.
An excellent example of an innovative company that has no comparables on the public market is Neuralink
Potential for High Returns
While investing in private companies can come with higher risks, it also offers the potential for higher returns. Many successful private companies have provided their early investors with substantial profits when they eventually go public or are acquired by larger entities.
New Regulatory Advancements
Recent changes in regulations have made it easier for individual investors to access private markets. Platforms like crowdfunding and specialized investment funds have opened doors for non-accredited investors, making private investing more accessible to a broader audience.
Opportunities IN THE PRIVATE MARKETS
Private equity and venture capital firms offer curated investment opportunities in private companies. These firms have industry expertise and often provide support to the companies they invest in, increasing the chances of success.
Personal Alignment with Company Values
Investing in private companies allows you to choose businesses that align with your personal values or interests. This can lead to a more engaging and satisfying investment experience.
Investment Case: What Is Middle Market Private Equity?
Middle-market private equity is a specific segment of the private equity industry that focuses on investments in companies valued between $50 million and $500 million. These companies usually occupy a niche that is unique and differentiated from smaller startups and large multinational corporations.
Unlike small startups, middle-market companies tend to be well-established with proven business models, thus minimizing some of the typical risks associated with investing in new or unproven ventures. They often have a stable customer base, consistent revenue streams, and experienced management teams, yet they still offer growth potential that can appeal to investors.
Boxabl stands as an excellent example of a middle-market private equity investment. When IPO CLUB invested in the company, it was valued at 400 million USD, fitting within the typical range for middle market firms. Companies like Boxabl in this sector tend to be established entities that have grown beyond the startup phase, often representing attractive investment opportunities with more stability than smaller startups. The investment by IPO CLUB reflects a strategic move to capitalize on the potential within this market segment.
How private markets offer the benefits of unrelated diversification
Unrelated diversification represents an investment strategy where the addition of new products, services, or business segments does not align with the existing offerings. It's about exploring areas that are completely different from current operations. In private markets, this approach can offer unique advantages. For instance, a portfolio of public stock focused on the industrial and retail sectors might choose to diversify into the unrelated field of hospitality, or a pharmaceutical firm might benefit from a venture into the fintech industry. By investing in areas that are unrelated to their core business, companies can tap into new growth opportunities and reduce exposure to industry-specific risks. Private markets, with their broad spectrum of industries and sectors, provide an ideal platform for unrelated diversification, allowing investors to explore various unrelated fields and benefit from potential growth in different markets, thus achieving a more balanced and resilient investment portfolio.
Conclusion
The global venture capital investment market size reached US$ 233.9 Billion in 2022
Investing in private companies does come with unique challenges and risks, including limited liquidity, lack of transparency, and higher investment minimums. However, the potential benefits and the current market dynamics present a compelling case for considering this investment avenue.
Now appears to be a particularly promising time to invest in private companies. With the right research, due diligence, and professional guidance, private company investments can become valuable to a diversified investment portfolio.
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Disclaimer
Private companies carry inherent risks and may not be suitable for all investors. The information provided in this article is for informational purposes only and should not be construed as investment advice. Always conduct thorough research and seek professional financial guidance before making investment decisions.
