Private Equity vs Public Equity

Investors are increasingly turning to private equity as an opportunity to diversify an investment portfolio beyond traditional investments. Research by EY shows that over the past decade private markets, which incorporate private equity, have shown stronger growth in AUM than public markets.

But what are the key differences? While public equity offers broad accessibility to a wider range of investors, as well as greater liquidity, private equity is more exclusive, typically requiring higher capital commitments and longer investment horizon. Understanding these differences helps make informed investment decisions and build a well-balanced portfolio.

Access and Investment Opportunities

Public equity markets, such as the London Stock Exchange and New York Stock Exchange, provide investors with access to publicly listed companies. These markets are highly liquid, allowing shares to be bought and sold quickly, and are subject to a high level of financial reporting requirements, regulatory oversight, and continuous market pricing. This level of disclosure and scrutiny makes public equities easier to research and evaluate, without the need for investors to have detailed knowledge, while the comprehensive range of platforms and relatively simple investment process makes it a widely accessible option for investors.

In contrast, private company investments are not available on public exchanges. While these investments are subject to regulatory oversight, particularly those offered by FCA regulated firms, they are typically not subject to the same reporting obligations as listed companies. In the case of private equity or venture capital, this allows businesses greater flexibility and agility in their strategic decision making without the need for shareholder approval. However this can result in financial data being less readily available to investors compared to public equities, which requires the investor to have more specialist knowledge. Private equity investments also typically involve longer holding periods and are often only accessible to institutional and high-net-worth investors due to higher capital requirements.

Risk and Return

A key difference between public and private equity is the risk profile. Public equity is subject to volatility driven by economic and geopolitical events, as well as investor sentiment. The ability for large numbers of investors to buy or sell shares quickly means prices fluctuate in real time, sometimes not reflecting a company’s fundamental value and underlying performance. This liquidity can be advantageous for investors, particularly if they need to access capital quickly, but also increases the risk of emotionally motivated decisions driving losses during market downturns.

Private equity on the other hand is less susceptible to daily price swings and private companies are not under the same pressure to meet quarterly earnings expectations. This longer term approach can be advantageous to businesses involved in emerging technologies which require significant time and capital to develop, commercialise, and scale. Unlike public firms, which often face short term pressures to demonstrate quarterly earnings at the expense of R&D, private businesses can invest strategically in high-risk, high-reward projects. While valuations are determined less frequently than the daily pricing of public companies, often through periodic assessments with independent oversight, this can create pricing inefficiencies, where assets may be undervalued or overvalued as it doesn’t necessarily reflect the latest commercial progress of the company.

Investing in private companies through a fund structure is generally higher risk than an index tracker focused on public exchange such as the FTSE, a portfolio will typically be concentrated in fewer holdings and rely on management execution over extended periods. Some private equity funds or managers also focus on venture or growth capital which is aimed at emerging businesses with high growth potential, but do not have the long term track record of large FTSE 100 companies for example. That said, historically, private equity has outperformed public equity. Data from Wealth Club, the UK's largest non-advisory investment service, indicates that since the late 1990s, private equity returns have surpassed those from public equity by 6-8% per annum.

Liquidity

Liquidity is arguably the most obvious differential between public and private equity. Public equities offer liquidity, allowing investors the flexibility to enter and exit positions easily. A high number of buyers and sellers, alongside the presence of market makers and continuous trading, ensures that assets can generally be converted into cash quickly, albeit with prices dictated by market conditions and sentiment.

Private investments, however, are generally more illiquid and require a long term commitment. Shares in privately held companies are not easily bought or sold, including when invested through a fund structure, and investors often need to wait for a liquidity event, such as an acquisition or initial public offering (IPO), to realise returns. 

This gives rise to what is known as the liquidity premium, representing the additional return investors expect for committing capital to assets that require a longer holding period, carry higher risks and cannot be easily sold. 

Who invests in the public and private equity

Both institutional and individual investors are active in public equities. Institutional investors, such as pension funds, insurance companies and mutual funds hold substantial capital allocations. Their involvement brings stability and liquidity to the markets, making very large investments and with the ability to influence corporate governance and strategic decisions in the underlying portfolio businesses.
Individual investors, often referred to as retail investors, also play a key role in public equities. They engage through direct stock purchases, which has been made easier in recent years by the rise of commission free online trading platforms or indirectly via investment vehicles like exchange-traded funds (ETFs) and open-ended investment companies (OEICs).  

Historically, private equity has been predominantly the domain of institutional investors. The longer term investment horizons, which often required significant capital commitments spanning several years, align with the long term liabilities and investment strategies of institutions like pension funds. Illiquidity presents less of an issue for large institutions whose scale, asset base and stability enables them to invest over longer periods without requiring immediate liquidity. In addition, high upfront capital requirements also meant that the minimum investment threshold for individual investors was often a barrier. 

Over the past decade, AUM in global private markets, which encompasses private equity, has increased from below $10 trillion in 2012 to over $24 trillion today, largely fuelled by institutional investors. However, with private wealth rising, along with advancements in technology, improved regulation, and increased investor sophistication, a growing number of private investors are capitalising on the benefits offered by private markets.

Investment Strategies and Market Trends

Investment strategies executed by managers differ significantly between public and private equity. Investors in public equities can typically choose between active or passive funds which offer very different approaches. An active fund is managed by a professional fund manager who researches and selects the fund assets that they feel offer the highest potential, typically aiming to outperform a stated benchmark or index. This approach offers the potential for higher returns in outperforming the market but will come with higher management fees than a passive fund and has a higher risk profile as stock selection decisions are made by individuals, based on an assessment of factors such as economic and market conditions or company specific issues.

Passive funds, on the other hand, try to replicate the performance of an index, such as the FTSE 100 or S&P 500, and will typically have lower costs as they do not require the same level of ongoing management and asset selection. However, as they are tied to an index, they lack the flexibility of active funds in being able to adjust portfolios based on current market conditions or expert knowledge of opportunities. 

In private equity, investment firms such as Maven take active management to the next level in order to closely manage higher risk underlying assets and maximise the potential returns. Whereas public markets are heavily analysed and considerable information is available on companies, leaving few undiscovered opportunities, private equity offers greater scope for underappreciated value, enabling skilled investors to identify overlooked opportunities and drive growth. 

In addition, the ability to drive value creation and improvements within portfolio companies helps drive private equity’s higher rates of return. Private equity investment firms are adept at identifying where a business has been passively managed and is likely underperforming, or where it is undervalued because its growth potential has not been fully recognised.

Private equity firms aim to build collaborative working relationships with each portfolio management team throughout the investment period, to help them achieve their growth objectives. This often involves taking a non-executive board seat, appointing an independent chair to provide strategic and operational support, and ensuring the manager maintains a close working knowledge of trading performance and can work closely with the business to drive growth, develop exit strategies and identify suitable trade or private equity buyers. 

There has been a recent global trend of public equity markets experiencing declines in the number of listed businesses as well as those pursuing IPOs, with companies choosing to remain private due to the increased availability of private funding, management’s desire to retain control, and the increased regulatory burden and costs for listed companies. While there are a number of high profile IPOs expected to take place this year such as Shein, both retail and institutional investors are seeing a contraction on high growth assets in public markets therefore reducing diversification. 

Making the Right Investment Choice

Relative allocations to the public and private equities depends on an investor’s objectives, risk tolerance, investment horizon, and liquidity requirements. Public equity provides flexibility, greater transparency, and easier access, making them suitable for investors who require liquidity and reduced risk. Whilst private equity typically requires longer commitments and higher initial investments, they do offer the potential for higher returns through investment at an early stage in high growth businesses which are developing exciting, emerging technologies and products. Private equity has also demonstrated resilience during market volatility due to low correlation with public investments, offering a buffer against stock market fluctuations or the broader global economy's whims.

Both have their advantages and challenges, but for many investors can be complementary, offering the chance to build a more diversified portfolio with a balance of growth potential and resilience.