Equity investments represent a stake in the ownership of a corporation. Public equity refers to a stake in a company that is publicly owned, while private equity refers to a stake in a company that is privately owned. The difference in corporate ownership translates into considerable differences in the characteristics of public vs. private equity investments.
Public equity is considered one of the three main asset classes, alongside bonds and cash. Private equity, however, is considered an “alternative” asset class, alongside a range of asset types including private debt, real estate, infrastructure and natural resources. The classification as an alternative asset class recognises the characteristics that are relatively unique to private equity, such as its fund structure, stakeholder restrictions, liquidity, and risk factors.
The table below summarises many of the unique characteristics of private equity compared to public equity.
| Public Markets | Private Markets | |
|---|---|---|
Who can purchase shares | Anyone with a brokerage account | ‘Accredited’ Investors only, meaning high-net-worth individuals and institutional investors |
Fund Structure | Equity investments in public companies are structured as either common or preferred stock shares. Investors can own shares directly or acquire them through mutual funds or ETFs that hold them in diversified portfolios. | Equity investments in private companies are typically structured as non-voting common shares. Investors can own such shares directly but more commonly acquire them through a stake in a private equity fund. PE funds are structured differently than mutual funds in the following ways:
|
Investor funding | Public equity is funded all at once by investors when acquired. | Investors commit to a certain size investment and the PE fund requests that investment through capital calls to acquire private company stakes. The funding process can take months or even years to complete. |
Capital raising | Public companies only raise new capital through their initial public offering (IPO) or the occasional offering of additional shares to the public. Most public equity investments are not associated with capital raising by the target company and are instead merely purchasing shares from other investors. | In private equity, most investments are part of bona fide capital raising activities that are acquiring capital to deploy directly into operations and growth of target companies. |
Liquidity of shares | Formal exchanges provide liquidity for public equities. Public markets are generally highly liquid. However, depending on the exchange, liquidity may be limited as well. | There are no formal exchanges or secondary markets. However, limited intermittent liquidity events may be facilitated by the GP with the assistance of an outside fund that specialises in secondaries. Moonfare offers early liquidity to its investors through its secondary market.* In addition, some liquidity exists in PE funds as part of the capital raising process (which can take 1-3 years for an investor to become fully invested) and the distribution process (which can begin returning capital to investors after about 5-7 years as target assets are sold). |
Fund Duration | Public market funds generally don’t have a pre-defined duration. | PE funds typically have a 10-12-year life. |
Voting rights | Yes. | Limited partners generally do not have voting rights in target companies as they acquire shares of the fund not of the target companies. However, the general partner (on behalf of the investors) usually has a significant influence on the overall strategy of the private companies in the fund’s portfolio. |
Distributions from funds | No because the profits are immediately reinvested by the fund manager. | Yes. Distributions are made to investors whenever assets in the portfolio are sold. |
Financial Disclosures | Required to disclose detailed financial statements to the public on a quarterly basis. | PE funds will disclose what they choose to their limited partners. |
Third-party analysis | Lots of third-party analysis is available on public companies. | Third-party info is very limited or hard to access as it’s not publicly available. |
Private vs. Public - Stage of target company’s growth
A major difference between public and private equity revolves around the stage of growth in the company.
Companies that are publicly owned represent well-established, somewhat mature businesses that have achieved the size and stature appropriate to public ownership. To be approved for public ownership by regulatory authorities and IPO underwriters, a company is typically expected to have at least the following:
- Consistent past revenue and earnings
- Sufficient capital to fund an IPO as well as its operations
- Long-term growth potential
- A strong management team in place
- Solid, audited financial statements
- Low capitalization leverage
By exclusion, private companies are generally those that have not yet met the above qualifications and are therefore at an earlier stage of their growth. As such, private equity investment targets may be anywhere on the spectrum of growth from companies preparing for an IPO all the way back to those just starting up.
Private vs public - the Net Return question
PE firms actively manage their portfolio of companies in their funds and charge higher management fees than public equity mutual funds. A question that is often raised is whether private equity investments underperform public equity investments when comparing net returns after fees.
When allowing for cash flow differences by using a technique called a public market equivalent (PME) and drawing comparisons between public equities and the relevant types of PE funds, the results indicate that private equity has historically outperformed public equity.
In a 2021 analysis, JP Morgan¹ found that the private equity industry is still outperforming public equity, quoting Steve Kaplan from the University of Chicago Booth School of Business. In response to arguments that there was little difference in public vs. private equity performance between 2006-2015, Kaplan noted that when private equity is defined as buyout, growth equity and venture capital funds, private equity’s PME as 1.05 using the S&P 500 or S&P 600, and 1.11 using the Russell 2000 index as the comparison benchmark (where a number greater than 1 symbolises outperformance).
Private vs public - what are you actually investing in?
A simplified comparison between public markets and private equity is also complicated by the fact that a public equity investor can invest in an instrument representing a broad public equity market (such as the MSCI World Index), but a private equity investor does not have such an option. Instead, the PE investor commits capital to an individual fund (or fund of funds) that may provide diversification benefits to their overall portfolio.
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Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.
