Most individual investors have heard of publicly traded investments, such as stocks and bonds. However, few have heard of private investments (or private assets, as they’re also known). This isn’t too surprising when you realize that, for the longest time, private investments were only available to large institutional investors, such as big pension plans.
Private investments offer opportunities that go far beyond what’s available on public stock and bond markets. Over 90% of U.S. companies with revenues between $100 million and $1 billion are privately owned (meaning that their shares are not traded on stock exchanges).1 That’s 90% of growth opportunities you’d be missing out on by investing only in public markets.
This is why large institutional investors place such importance on private assets. The Canada Pension Plan, for example, has over 50% of its portfolio taken up by private equity, private credit and infrastructure.2
In this article, we’ll lift the lid on private investments. We’ll explain what they are, how they work, why they’re so attractive and how to include them in your portfolio.
What are private investments?
Private investments are financial assets that go beyond publicly traded investments, such as stocks and bonds. They’re typically made up of private credit, debt and infrastructure.
What are the key advantages of private investments?
Private investments have several compelling benefits that make them a valuable addition to most portfolios. These include:
- Diversification: they allow investors to spread their risk across different types of assets and sectors that aren't traded publicly.
- Lower volatility: private investments aren't as affected by broader market changes as publicly traded investments. This can help reduce overall portfolio volatility.
- Access to unique sectors: private investments provide access to sectors that are under-represented in the public markets, such as private technology start-ups, aerospace and infrastructure projects.
- Different types of returns: private investments offer an alternative to the volatile and unpredictable public markets. They can make money through the growth and subsequent sell-off of the companies they invest in.
Breakdown of private investments
There are three key types of private investments:
Private equity
Investing in privately held companies is usually carried out through private equity funds. These funds bring together money from a pool of investors to buy shares in a selection of private companies.
How private equity works:
- Private equity firms seek out and invest in lesser-known companies that have the potential to grow. They use their expertise to improve those companies’ operations, expand their markets and make more money.
- Private equity returns are generated through a combination of capital appreciation (as the company grows) and potential dividends.
- Private equity investors can choose a number of ways to cash in their investment: they can sell the company directly to an interested buyer or sell it to the public through an initial public offering (IPO), whereby shares are sold to investors on the stock market.
Much of the growth of privately held companies happens before they go public. Private equity is a particularly attractive option because investors can get to benefit from potentially huge growth before shares are offered to the public.
Private credit
The 2007-2008 financial crisis led to banks reducing the amount they were willing to lend to businesses. This created the opportunity for private lenders to fill the gap.
How private credit works:
- Investors provide direct loans to companies.
- The types of loans can include term loans, revolving credit facilities and mezzanine debt.
- Private lenders often offer more flexible terms and are more inclined to meet specific borrower needs. This makes them a good choice over traditional bank loans.
Opportunities for investors:
- Private credit often delivers superior returns with lower volatility, when compared to traditional fixed income investments.
- Private credit has a low correlation with public debt markets (such as bonds). This means that the values of private credit assets and public debt don’t move in the same direction, at the same time. This leads to greater diversification.
- Managers of private credit funds typically carry out extensive research on the companies they lend to and structure the deals in such a way as to minimize risk, to help protect investors’ capital.
Private infrastructure
Private infrastructure assets are typically essential projects, such as roads, bridges, pipelines, airports, renewable energy and water utilities.
How private infrastructure works:
- Public-private partnerships give private investors the opportunity to collaborate with government bodies to fund, construct and manage infrastructure projects.
- Through dividends, profit sharing or the eventual sale of assets, investors can receive returns from owning equity in private infrastructure projects.
- User fees, government payments or both contribute to revenue for private infrastructure projects.
Opportunities for investors:
- Private infrastructure investments have extremely low correlation to other asset classes, which leads to greater diversification.
- Private infrastructure can provide investors with a reliable income stream, which can be especially useful when stock markets are volatile.
- Private infrastructure assets often provide essential services, so they can be more resilient than many publicly traded assets during economic downturns.
How to invest in private investments
Up until fairly recently, private investments were only available to large institutional investors and affluent individuals. However, the benefits of private investments are becoming available to a broader range of investors.
IG clients have access to iProfile Portfolios, which take the same approach as that used by large pension plans and other institutional investors. This includes access to private investments.
Talk to your IG Advisor today about how iProfile Portfolios could provide you with the benefits of private investments, including greater diversification, low correlation to public markets, access to unique sectors and potentially higher returns than publicly traded assets.
If you don’t have an IG Advisor, you can find one here.
Sources:
1 Capital IQ/NAICS association data, as of March 2024. Sample size of 185,000 of the largest U.S. companies.
2 CPPIB annual report 2024.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
Commissions, fees and expenses may be associated with mutual fund investments and the use of iProfileTM Managed Asset Program. Read the prospectus and speak to an IG Advisor before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. An asset allocation service, iProfile is a managed asset program for clients with a minimum of $250,000 invested in the iProfile program. Mutual funds and investment products and services are offered through the Mutual Fund Division of IG Wealth Management Inc. (in Quebec, a firm in financial planning). And additional investment products and brokerage services are offered through the Investment Dealer, IG Wealth Management Inc. (in Quebec, a firm in financial planning), a member of the Canadian Investor Protection Fund.
