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The Role of Private Market Investments

Role of Private Market Investments

Where have all the public companies gone?

The role and importance for allocating to the private markets has increased materially over the past two decades. This point is illustrated by the change in the public equity market landscape. The number of U.S.-listed public companies has dropped by over 50% during the prior two decades. This is fewer companies than existed in 1982 when the economy was less than half the current size.[1]

Why private markets?

We believe that it is increasingly challenging for investors to get diversified exposure to the U.S. economy, and real economic value creation, without allocating to the private markets. Private market investments offer clients compelling ways to increase their portfolio’s opportunity set by gaining exposure to unique and distinct areas of the capital markets (e.g. Technology & Healthcare Venture Capital, Small Company Buyout, Niche Private Real Estate, Mobile Home Communities, etc.). Private market investments merit inclusion in a diversified portfolio for the following reasons:

• Historically, private equity has delivered a long-term premium return of approximately 5% (annualized) over the public capital markets.[2]

• Certain strategies and asset classes historically exhibit low correlations to traditional public market investments.

• Large opportunity set - 94% of all companies or approximately 344,000 private companies have revenue from $5M - $100M.[3]

• 98% of companies in the U.S. are controlled by private capital.[4]

• They often require a long-term investment horizon that is aligned with the return objectives of many investors.

• We believe the private markets represent one of the few inefficient investment frontiers, where investors can benefit from asymmetric information sharing.

Private Equity Market Trends

Why it is more important than ever to incorporate private market investments within a diversified investment portfolio:

§ More and more of a company’s growth and value creation is being captured by private investors than historically has been the case. (e.g. Facebook, Snap, ServiceNow)

§ The diminishing IPO market caused by an increased regulatory environment and reporting burdens.

§ Private companies are being purchased by cash rich strategic acquirers more frequently.

§ Demographic trends led by an aging U.S. workforce seeking liquidity for private companies. (Baby boomers seeking retirement currently account for 54% of private businesses owners.[5])

The Rise of Public Equity Indexation & Market Cap-Weighted Concentration

The 5 largest S&P 500 stocks are technology companies with a combined market capitalization equal to the bottom 282 constituents. Source: Seeking Alpha, June 2018

We believe private market investments are essential for maintaining a diversified portfolio given the continued adoption of passive or index investing in the public markets. According to a January 2018 Vanguard study, approximately 45% of all U.S. domiciled equity mutual fund and ETF assets are invested in passive index funds. This is a material increase from less than 5% in 1995.[6] While we believe there is a role for index investing, we are mindful of the potential increased risks.

New World Advisor’s approach to Private Market Investments

We add value for clients by providing access to institutional quality, niche private market investment managers and opportunities. Generally, our recommended investments are managed by an experienced team that is solely investment-focused and independent, maintaining a disciplined investment process contributing to a superior, long-term track record. We focus our due diligence efforts on both multi-manager strategies, which serves as a core allocation providing diversification across investment styles, and single manager strategies with the prospects for greater returns and a targeted investment opportunity.

New World Advisors, LLC ("New World") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). New World provides investment advisory and related services to clients nationally. New World will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which New World conducts business. New World renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.

[1] Bureau of Economic Analysis of the U.S. Department of Commerce. 1982 US Real GDP $6.8T; 2017 US Real GDP $18T

[2] Cambridge Associates US Private Equity Index (12.94%) 20-Year vs. S&P 500 Index TR (7.42%) as of September 2018

[3] U.S. Census Data 2012

[4] Commonfund Captial, Inc 2009 Chicago Advisory Committee Meeting

[5] Capital IQ, June 2015

[6] Vanguard Research January 2018

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