Why it’s time to look beyond stocks and fixed income to private markets.
Many investors look at diversification and focus on achieving a mix of equities and fixed-income assets across different sectors or even geographies. While that’s a valuable investment strategy, it’s unduly limited.
Fixed-income securities offer investors a steady payment stream and stability, but in exchange, investors receive a rate of return that may not be much higher than benchmark U.S. treasury rates. In fact, depending on the prevailing rates at time of issuance, the rate of a particular security may actually be below current interest rates.
Equities have a higher risk/reward profile but the universe of companies traded on public markets is considerably smaller than you might think. Despite the prominent news coverage of U.S. stock markets, the number of companies that are publicly traded has actually declined since peaking in the late 1990s.1
If you are only investing in exchange-traded companies, you may be artificially restricting your potential for diversification.
Privately-held companies are in the majority
According to a DeMarche white paper, 87% of U.S. companies and 95% of European companies with $100 million+ in revenues are privately held. “In opportunity terms, that’s a universe of 95,000 private companies with annual revenues exceeding $100 million, versus just 10,000 publicly traded companies that meet the same criteria.”2
Understanding the breadth of the private sector opportunity
Privately held companies run the gamut, from the 5.4 million new business applications filed in the U.S. during 20214 to Forbes’ 2022 list of the largest private companies in America, which included 245 U.S.-based firms with revenues of $2 billion or more.5 From the newest fintech with a disruptive business model, to the store down the block, to well-known brands like KPMG, IKEA, Lego – the private sector includes businesses of every shape, size, sector, and maturity.
Companies have a variety of reasons for staying private. Some want to grow more prior to an initial public offering (IPO). Others may want to tightly control ownership, or be free to focus on longer term objectives rather than hitting quarterly revenue targets for equity shareholders.
With more routes to capital than ever before, these companies can choose to remain privately-held without sacrificing access to funding. Since the financial crisis, non-bank lenders have replaced banks as a primary source of financing to thousands of businesses. This has resulted in exponential growth in private credit, a fast-growing multi-trillion-dollar asset class.
The appeal for investors
Private credit helps to power the economy by supporting the growth of middle market businesses. With the number of transactions on the rise, savvy investors are finding that deals that benefit Main Street can also help boost their portfolios’ performance.
Investors find private credit attractive from both a performance and capital allocation standpoint. Yields on private credit transactions typically exceed benchmark rates while shorter duration deals allow investors to redeploy capital as market conditions change. Corporate loans and asset-based deals can also provide predictable, stable income similar to a coupon payment on a bond.
Finding private credit investments
Until now, it has been hard for investors to access these opportunities. Historically, borrowers and/or underwriters would reach out to institutional investors or family offices with whom they’d previously worked. Lacking a good distribution system, many investors – including individual accredited investors – were kept on the outside. In those rare cases where an investor could find a private credit deal, a lack of standardization made it difficult to compare deals and make informed decisions.
Percent has changed this, creating a marketplace exclusively dedicated to private credit. Using our digitally-native platform, borrowers and underwriters can bring more deals to market and more easily reach retail accredited and institutional investors. Investors are able to review essential deal information and documentation in one place, analyze market data and ultimately give them more tools to conduct due diligence and diversify their portfolio to incorporate higher-yielding private credit investments.
More about Percent
Percent makes it easy for accredited investors to discover private credit deals, specify the terms as which they are willing to invest, and manage and monitor their private credit investments online. At any given time, investors can view active deals from a number of borrowers and invest with as little as $500, creating broader diversification for their portfolios and supporting growing businesses.
1USA Listed companies – data, chart | TheGlobalEconomy.com
2https://www.demarche.com/whitepaper/january-white-paper/
3Private Market Investing: Staying Private Longer Leads to Opportunity, Hamilton Lane, April 2022
4U.S. Chamber of Commerce, The State of Small Business Now, April 2023