Good companies go private, loss-makers go public

Once the domain of institutional investors, private market investing is going mainstream and may even reach a value of $30 trillion in the years ahead. Urs Wietlisbach, Co-founder at Partners Group, views private markets as the new traditional asset class and believes investors can find better opportunities in private markets, not public.

“Good companies go private because it’s much more efficient to run a company and not-so-good companies, loss-making companies, go to the market.”

He points out that many recent IPOs have been loss-makers, such as Rivian or Doordash.

According to Wietlisbach, the investment space has become much more dynamic. Where once, deals might take 6-9 months to finalise and managers could take a more passive approach, today’s private market investors are required to be proactive and move quickly on opportunities with deals taking 6 weeks.

In this edition of Expert Insights, Wietlisbach discusses the changing role of private markets, the outlook and the challenges for investors in this space.

Key take-outs:

• Private markets are typically more efficient as they require less compliance and administration compared to public markets. It has become the new traditional asset class.
• The rapid growth of this asset class may see it reach $30 trillion in assets under management in the future.
• The rapid growth of this asset class requires investors to be highly proactive and rapid in transactions compared to a more passive approach in the past.

Edited transcript

What are the roles of public and private markets today compared to the past?

It has shifted quite dramatically. In the past, public markets were for companies who make earnings. Today, if you look at the last three years, public markets, most of the IPOs were loss-making companies like Rivian or DoorDash. And private equity is today the new traditional asset class, because private equity invests in real companies with real earnings, and today private equities in each sector globally, small-cap, mid-cap, and large-cap. So, that's the new traditional asset class.

Why has the number of public companies in the US fallen 50% in the last 25 years?

This is one of these reasons public companies make it very difficult to run companies through compliance and so on, so good companies go private because they like the private markets better because it's much more efficient to run a company. And I call it not so good companies, loss-making companies go to the market, so I guess that's one of the reasons. And they also disappear, some of them, the loss-makings from the public market again.

How do you see private markets going in the next five years?

It has a further growth. You see that in the last two decades, private equity always tripled per decade. And the reasons that I said before, institution clients are increasing, now retail, high net worth comes into it, SMSF, defined contribution comes into it. There's no reason, and the forecast says, "Well, it will triple and then it's going to be a 30 trillion market, the private equity market."

What challenges do you see for private market investors going forward?

The big challenge is what I said before, to speak growth. Today the market has grown, so today you need to be much more active than you used to be. In the old days it was easy, you just took a company levered it up, today the leverage is only 50% on average, that's a decent leverage, not too high. But the problem is to turn around, when a company is shown to you, you used to have six, nine months to make a decision, today it's six weeks.

And so you need to proactively source transactions and working on transactions before they come up for sale. That's the big difference today. And I would say about 70% of the private equity, cheap is out there, are still in this old mode. And about 30%, including us, are really just proactive, and that's really important if you want to have any returns in the future.

What tips do you have for private equity investors?

Pick the managers who are having an active approach. The easiest thing to find out, if they are really active, is take investment professionals per assets on the management. If they have enough they should be active, but there are many players who have too much assets in the meantime for two small teams, and they can be only passive. And being a passive private equity investor is not going to make you happy as an investor.

Learn more about Partners Group Australia

Partners Group are one of the largest private markets investment managers in the world. They have recently launched the Global Income Fund - Unlisted in Australia. To learn more, please visit their website.