When it comes to building a diversified investment portfolio, most people think of traditional assets like public stocks, bonds, and real estate. While these are undoubtedly essential components, savvy investors are increasingly recognizing the value of including private company investments in their portfolios. Private company investments can be a valuable addition to your investment strategy, driving both diversification and higher returns, especially as companies stay private longer.
At EquityZen, we focus on offering investment opportunities in late-stage private companies that have been backed by top-tier venture capital investors. These investments are typically considered within the Alternatives allocation of an overall diversified portfolio. Here we’ll outline some of the benefits of late-stage private company investing and the benefits they can offer your portfolio.
Invest beyond public market volatility
Diversification is a cornerstone of prudent investing. By spreading investments across different asset classes investors can mitigate risk and enhance long-term returns, though diversification does not protect against loss. Private company investments offer a unique avenue for diversification because they don't always move in sync with public markets.
Unlike publicly traded stocks and bonds, the value of private company investments are not subject to the daily fluctuations of the stock market. In fact, we typically see a time lag between when equity valuations change in the public markets and how these changes impact the valuations of private companies. This is because private companies are typically only revalued when a company raises a fresh round of funding, which only happens every few years at the most1. This lack of correlation with public markets means that private company investments can act as a hedge against stock market volatility. When the stock market experiences turbulence, your private investments may remain relatively stable. It’s important to note that private company investments can decrease in value, but investors are not subject to the constant mark-to-market that occurs in the public markets. This reduces overall volatility, while increasing diversification.
Interested in exploring the private companies trading on EquityZen's marketplace?
Maximize your (return) potential
One of the most compelling reasons to consider private company investments is the potential for higher returns. Private companies include early-stage startups, growing businesses, or companies undergoing significant transformations. These companies are not yet available for public investment, but can offer substantial growth potential. With companies staying private longer than ever, value creation is happening in the private markets. There are over 1,2000 “Unicorn” companies, or companies valued at over $1 billion globally2. In aggregate, these companies are worth over $3.8 trillion. By investing in the private markets, investors can be part of the growth happening in these private companies.
When it comes to late stage private investing, where EquityZen focuses, recent studies have shown the potential for strong returns. In fact, investing at the price of a company's Series E, F or G, has generated a mean annualized return of 75% + 6-months post IPO, according to one study3. Meanwhile, investors who invested at the IPO-first day close price achieved a mean return of -1.4% over the same period. This points to the return potential of investing pre-IPO, instead of waiting to invest in the public markets.
Investing in private companies allows investors to capture value at an earlier stage in their growth trajectory. If a private company succeeds and experiences significant growth, the return on investment can be substantial. This potential for higher returns can enhance the overall performance of your portfolio.
Invest in the next big thing, before it's the next big thing
At EquityZen, we believe the private market is the home of innovation. Private company investments grant you access to opportunities that aren't available in the public markets, within companies and industries that are shaping the world we live in. You can invest in promising tech companies that may not have publicly traded counterparts because these companies are creating new industries. Think of the online grocery market before Instacart: eleven years ago when Instacart was founded this was a novel concept that didn’t have a public market equivalent. Access to unique, game changing private investments can be appealing to investors looking for opportunities outside of traditional public market options. The private markets offer this access and with EquityZen accredited investors can start investing with as little as $10,000.
Things to consider
It's important to note that private company investments typically come with longer investment horizons and lower liquidity compared to publicly traded assets. When you invest in a private company, you may need to hold your investment for 3 to 10 years before realizing a return. However, this illiquidity can be offset by the potential for higher returns and diversification benefits. You can learn more about the liquidity premium here. Ultimately, the decision to include private company investments in your portfolio should align with your long-term financial goals, risk tolerance, and investment horizon.
Incorporating private company investments into your portfolio can provide benefits like enhancing diversification and providing potential for higher returns. With so many exciting companies growing within the private markets, it’s an exciting time to dive in. Curious where to start? Check out our guide to Pre-IPO investing or our Getting Started Series.
Disclaimer: Investments in private companies are illiquid, may be speculative, and have substantial risks, including the risk of loss. Not all private companies will go public or get acquired.
Interested in exploring the private companies trading on EquityZen's marketplace?
Sources:
- Average of 31 months or 2.5 years. Source: Crunchbase
- CB Insights as of September 26, 2023
- The dataset includes all technology media and telecommunication (TMT) IPOs over a 10-year period - from 2011 to December 2021 that had an IPO on a US exchange, based on a sample size of 147 companies. Please see the full report for detailed information on how this return was calculated.
