It is widely known, at least in the investing world, that private equity has an additional premium (you can think of it as risk) over public equity, and hence on a long term average basis, your private equity investments would give you a higher return than your public equity investments. It is the logic that we all know, the higher the risk, the higher the return. The spread is usually about 1-2%. Liquidity risk is one of the common additional risks of investing in private equity (not easy to monetize/sell).
There is also the belief that private equity is immune to fluctuations in the public markets. That’s also partly the reason why investors choose to diversify their portfolio to invest in private markets. It is true to a certain extent. Fluctuations in the public markets on a daily basis can be caused by reactions from investors towards announcements by Fed, macroeconomic results from China, earnings cut by big tech companies or nowadays, by Trump’s tweets. From a portfolio’s standpoint, only the public investments valuations will move according as the share price will be hit directly, but not the private investments. Even if they are being recorded at fair value in the portfolio, the valuation shouldn’t be changed just by the daily reactions from investors unless of course it is very specific to the company.
But yesterday I came across this article in FT:
This shows that sometimes, movement in private markets can cause fluctuations in public markets. In fact that’s the current trend. At least since a couple of years ago when number of unicorns started to rise and we have people like SoftBank pouring huge money to start-ups. But that relationship is clear to me. What I found interesting in this article is:
Fluctuations in the public markets do have an impact on the private companies because people tend to value the latter by comparing against the closest peer which is listed publicly.
Something that I should explore further.