Inside Alts: Top investors weigh private options as public markets shrink

Key Concepts

• Public vs. Private Markets: The distinction and blurring lines between investing in publicly traded companies and privately held ones.
• Diversification: The strategy of spreading investments across different asset classes and markets to reduce risk.
• IPO (Initial Public Offering): The process by which a private company becomes public by selling shares to the public for the first time.
• Tokenization: The process of converting rights to an asset into a digital token, potentially making illiquid assets more tradable.
• Retail Investor: Individual investors who are not professional money managers.
• Institutional Investor: Large organizations that invest on behalf of their members or clients.
• Alternatives (Alts): Investment products outside of traditional stocks, bonds, and cash, such as private equity, venture capital, and hedge funds.
• Semi-liquid Products: Investment vehicles that offer some liquidity but are not as readily tradable as public securities.
• Fiduciary Duty: The legal and ethical obligation to act in the best interests of another party.
• Risk Management: Strategies and processes to identify, assess, and mitigate potential financial losses.
• Due Diligence: The process of investigating and verifying information before making an investment decision.
• Public Markets Premium: The valuation advantage that publicly traded companies often have over their private counterparts.
• Public to Private Continuum: The idea that investment opportunities should span across both public and private markets seamlessly.
• Evergreen Funds/Interval Funds: Investment structures designed to hold assets for longer periods, offering more stable ownership through market cycles.

Public vs. Private Markets: The Shifting Landscape

The number of publicly traded companies has been declining, prompting investors to seek diversification in private markets. This trend has led to a blurring of the lines between public and private markets, raising questions about whether the potential benefits outweigh the risks. The CNBC's 15th annual Delivering Alpha conference brought together industry leaders to discuss these dynamics.

Opportunities and Investment Strategies

• General Atlantic primarily focuses on private markets, while CO2 invests in both public and private markets.
• There's a debate on whether private markets currently hold the most opportunity or if opportunities can be found across both.
• Philippe emphasizes the importance of understanding public tech companies (e.g., Oracle, Google, Microsoft) driving AI innovation, even for private market investors, as their actions inform private investment decisions.
• CO2 acknowledges that while investing in both public and private markets can offer an advantage, the mindsets required are different. Public market investing requires belief in the future and an assessment of whether that future is already priced in. Private market investing, often with longer horizons, demands more patience, active involvement with founders, and a greater degree of certainty.
• The duration offered by private investments (5-7 year horizons) allows investors to play out market cycles longer than the often shorter-term performance demands of public markets.

The IPO Process and Market Accessibility

A key discussion point is the state of the IPO process and the accessibility of private companies to retail investors.

• Argument: The IPO market is considered "broken" by some, evidenced by the significant decrease in IPOs over the past 20-30 years. This makes it harder for retail investors to participate in the growth of companies before they go public.
• Proposed Solution: Tokenization of private assets is seen as a potential fix. By tokenizing, private assets can become more tradable, akin to public assets, allowing for trading at premiums or discounts. This could lead to a future where all assets are public and tradable, potentially causing some companies to regret not being tokenized.
• Counter-Argument/Optimism: Others are more optimistic about the IPO market's recovery. They point to an "exit recession" in private markets over the last three years, partly due to regulatory factors and market trends. However, "green shoots" were observed this year, with momentum built for 2026, despite setbacks like government shutdowns. There's a belief that public investors desire high-quality companies to go public.

Retail Investor Access to Alternatives

A significant topic is how retail investors can diversify into alternative investments, given the growth of private companies and the trend of companies staying private longer (e.g., OpenAI valued at half a trillion dollars as a private company).

• JP Morgan and Aries are actively involved in providing retail access to alternatives, through third parties and proprietary products.
• Core Principle: When offering retail access to any investment product, fiduciary duty is paramount, ensuring investors understand what they are buying.
• Investor Sophistication: There's an argument that everyday investors are smarter than often given credit for, capable of understanding complex investments and making informed decisions.
• Benefits of Access: Increasing individual investor access to investment products that aid wealth creation and retirement is viewed as a positive development. Private equity, venture capital, and other private investments should be accessible to retail investors if structured correctly and with proper advice.
• Partnership Focus: Collaboration often involves not just product development but also educating advisors and end clients about risks and benefits.
• Portfolio Enhancement: Alternatives, when mixed with traditional portfolios (e.g., a 60/40 portfolio), can lead to better investment outcomes.
• Regulatory Support: Current administration changes are facilitating the inclusion of alternatives in retirement accounts (e.g., 401k) and future investment accounts, enabling participation in the 99% of U.S. companies that are not public.
• Public Markets Premium Avoidance: Investing in private companies means not paying a public markets premium, offering significant value.
• Public to Private Continuum: The ideal scenario is a seamless continuum from public to private investments, with risk management and appropriate "bite-size" investments for all.

Risk Management and Investor Behavior in Alternatives

The discussion also delves into how retail investors can manage risk when entering alternative investments.

• Capturing Value Through Cycles: Semi-liquid structures allow investors to own assets through market cycles, capturing full value creation.
• Addressing Volatility: During market downturns, liquidity can be scarce at desired prices. Institutional investors have long understood this, while retail investors have been trained to prioritize liquidity, sometimes leading to selling assets they shouldn't.
• Structuring Out Bad Behavior: Market smoothing and ownership of assets through structures like evergreen and interval funds can mitigate impulsive selling behavior by providing a longer-term perspective.
• Long-Term Ownership: The concept of owning assets indefinitely, without the pressure of fund maturity dates or forced sales at unfavorable mark-to-market valuations, is highlighted. This is particularly relevant for private assets that may not go public.
• Opportunity for "The Rest of America": When managed with the right bite-size and risk management, these opportunities can benefit a broader population.

Conclusion

The conversation underscores a significant shift towards private markets, driven by a shrinking public market and the potential for higher returns. However, the key challenge lies in democratizing access to these markets for retail investors while ensuring robust risk management and investor education. Tokenization and innovative fund structures are emerging as potential solutions to bridge the gap between public and private, creating a more inclusive investment landscape. The ultimate goal is to enable investors to participate in the full spectrum of investment opportunities, from public to private, through a well-managed and accessible continuum.