Investors Have Been Selling Off Their Stakes In Private Companies Like Crazy

Investors Have Been Selling Off Their Stakes In Private Companies Like Crazy
Theodora Lee Joseph, CFA

over 1 year ago2 mins

In previous bear markets, you might’ve been smart to invest in private equity (PE) and venture capital (VC) firms – those that invest in private companies in hopes they’ll score big when they hit the stock market. Private equity, after all, has historically ignored the stock market’s ups and downs, helping steady your portfolio during turbulent times. Recently, though, the two markets seem to have become increasingly correlated.

We know this because major investors sold off a record $33 billion of private assets in the first six months of 2022, which comes as they’ve invested more and more in private equity. That matters because when stocks fall, those investors need to buy stocks to rebalance their allocations. To do that, they need to sell other assets in their portfolio. And since they own a bigger proportion of private assets than they used to, they need to sell a bigger proportion of them too.

Now, the selloff isn’t a problem in and of itself. Here’s the problem: data from Jefferies has shown that investors sold their private assets for 30% less than they were worth at their previous valuation. That makes the US stock market’s 14% drop this year look like small fry, and it certainly won’t have done PE and VC firms any favors.

Put bluntly, the diversification benefit of investing in PE and VC firms is – at least for now – non-existent. And when the Fed hikes rates even more in the second half of the year, we could see a repeat of the exact same scenario: stocks tumble, funds rebalance, and the private market takes another hit. Instead, you’d be better off investing in alternative assets that definitively don’t follow the same path as stocks. And as luck would have it, we have a few of those for you…

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