Q: How can I justify a larger allocation to private equity than public equity?
(Referencing: Out with the Old and In with the New: A 50% Private Markets Portfolio)
— PacNW CIO
A: For any investors who “grew up” investing in the 1990s or early 2000s, today’s investment landscape has changed significantly – particularly in U.S. Equity Markets.
1. Public equity performance can be highly dependent on a few companies
As of the beginning of this year, the seven largest companies (sometimes called the “Magnificent 7”) took up a full 28% of the S&P 500 market cap. The 25 largest companies constituted nearly half of the index, while the remaining 475 companies accounted for the other half.
S&P 500 Constituents by Market Cap1,2
2. Companies are finding it easier and more efficient to raise capital in the private markets
The Sarbanes-Oxley Act of 2002 and other regulatory changes made it progressively more difficult and more expensive to operate as a publicly traded company.3
At the same time, rule changes allowed more private investors to get into private investments—for example, the 2012 JOBS Act and the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act—which allowed private investments to raise more money.
Combined, these forces aided the private equity market in passing the public equity markets for new capital fundraising more than a decade ago.
Capital Raised in the U.S. Public Markets vs. Private Markets4
As a result, private markets are often the first stop for companies looking to raise capital today.
3. Companies continue to delay (or avoid) going public
A result of companies finding it easier and more efficient to raise capital in the private markets is not only that fewer companies are entering the public markets than in the past, but those that do enter are typically waiting longer to do so. The median age of a company IPOing today is ten years vs. under seven years two decades prior.
Median Age of IPOs5
As a result, many companies are already further along in their growth curve before becoming available for public investment.
Additionally, the U.S. public equity markets today hold fewer than 4,000 traded companies—approximately half the number of publicly traded stocks that existed just a couple decades ago.
Meanwhile, there are approximately 10x the number of privately held companies of the same size in the U.S.6
Conclusion: Beyond even the risk-and-return considerations of private equity, we think there are many justifications for private equity allocations as large or larger than public equity allocations.
