Private markets are deemed attractive to some investors, such as private investors, angel investors, VCs, and PE companies as they can offer premium returns.
Looking into private markets more closely, investors expect to be compensated for taking on the additional risks faced within private markets in the form of higher returns or return premiums.
Over and above public market returns. At a high level the premium between public markets and private markets exists due to illiquidity.
Private market investments are not traded over any exchange, which makes buying and selling investments more difficult.
The premium between public and private market returns also exists due to information asymmetry.
While public market investments typically have significant transparency of information, private markets typically have much lower informational disclosure requirements resulting in more risk and therefore a higher required return.
However, the lack of public information often results in private market investors demanding more information from the company or asset directly to better inform their investment decision.
This may result in the private market investor having more specific detailed information than a public market investor who is forced to rely on the more standardized public market disclosures.
VC fund analysts will be expected to become an expert in their field of investment due to the in-depth level of due diligence they'll need to conduct to determine whether a company is a good investment decision.
As a result, some VC funds may only focus on one type of asset, such as early stage biotech funds to enhance the chance of higher returns, as they'll become experts in this particular asset.
This is known as asset selection.
Private market investment managers may be able to deliver higher returns due to better asset selection decisions.
Since they may have a particular product or sector expertise, they will typically need to have a high level of conviction before making an investment due to the illiquidity of private market investments making exiting an investment more challenging.
