Key Benefits of Private Investments for Financial Growth

26 August 2024 by National Bank

Private investments, such as private equity or alternative investments, encompass a range of asset classes that are not listed on public exchanges. These can include venture capital, private equity, real estate, hedge funds, and direct investments in private companies. Private investments offer a variety of unique opportunities for investors seeking to diversify their portfolios and achieve high returns not necessarily always available in public markets.

Minimizing market volatility

A key benefit of private investments is their ability to diversify and mitigate market instability. Investors may lessen their susceptibility to public market fluctuations by adding private assets to their portfolios. These investments usually exhibit minimal correlation with conventional asset classes, such as stocks and bonds, which can shield against market slumps and create more stable returns, thus lowering the total risk of the portfolio.

Source: Harbourvest. Data as of June 30, 2023. Returns in USD. https://www.harbourvest.com/insights-news/insights/evergreen-funds-accessing-private-markets-alpha/

Potential for higher returns

Private investments can offer higher returns compared to traditional public market investments. For instance, private equity funds aim to generate significant returns by investing in and improving the performance of private companies before selling them at a profit. Similarly, venture capital funds invest in early-stage startups with high growth potential. While these investments carry higher risk, the potential for outsized returns can be attractive to investors willing to accept this risk.

Source: Harbourvest. Data as of June 30, 2023. Returns in USD. https://www.harbourvest.com/insights-news/insights/evergreen-funds-accessing-private-markets-alpha/

Untapped opportunities

Private investments open doors to opportunities that public markets don't offer. Take private equity firms, which tend to direct their funds into areas or businesses less prominent in the public sphere. These might be burgeoning industries, specialized market niches, or businesses experiencing substantial change. Private equity investors have the added advantage of securing exclusive deals and opportunities that aren't on the table for everyone.

Source: Capital IQ (February 2023). https://hamiltonlane.maglr.com/a-guide-to-private-markets/why-should-investors-consider-private-markets-in-their-portfolio

Active management and value Creation

Another advantage of private investments is the active management approach taken by private equity and venture capital firms. These firms typically work closely with the management teams of the companies they invest in to drive growth and improve operational efficiencies. This hands-on approach can lead to significant value creation and enhanced returns for investors. In contrast, public market investments are often more passive, with limited opportunities for investors to influence the management and strategic direction of the companies in which they invest in.

Long-term investment horizon

Private investments typically have a longer investment horizon compared to public market investments. This long-term focus allows private equity and venture capital firms to implement strategic initiatives and drive sustainable growth in their portfolio companies. While this longer investment horizon can require investors to lock up their capital for an extended period, it also aligns with the goal of achieving higher returns over time.

Considering private investments

Private investments offer a range of opportunities for investors seeking to diversify their portfolios, achieve higher returns, and access unique investment opportunities. While these investments carry higher risk and often require a longer investment horizon, the potential benefits can be significant. By incorporating private assets into their investment strategies, investors can tap into the value creation potential of private equity, venture capital, real estate, and other alternative investments. As the investment landscape continues to evolve, private investments will likely play an increasingly important role in the portfolios of sophisticated investors seeking to optimize their returns and manage risk.

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