Access to information in private markets can be more challenging than in public markets. (UBS)

Private markets can employ different strategies to add value. Private equity managers can focus on buying stakes in companies ranging from early stage, expansion or the turn around of mature businesses. Private debt managers, on the other hand, specialize in everything from underwriting loans to small, mid or large cap companies to restructuring default debt. Meanwhile, private real estate fund managers can focus on the acquisition of high-quality assets, property refurbishment or repositioning, as well as new development projects, to generate returns.

The individual manager(s) of a fund is referred to as the General Partner (GP), while Limited Partners (LP) are the investors in the fund. When Limited Partners commit to a fund, they are not immediately invested. The General Partner will “call” capital (request investors send a portion of their total commitment) as it invests out the fund over time. Investment periods typically range from 3–6 years. When the portfolio companies are sold, the General Partner will distribute capital back to the Limited Partners.

The GP then creates a portfolio and works directly with the companies and projects to increase their chance of success with a particular strategic focus or asset class. GPs require a management fee to cover for operating costs and an incentive fee that is paid to the manager in case the fund performs above a specific hurdle rate of return. This fee is known as carried interest.

Other investors may prefer a direct approach, buying stakes in a range of private companies without the help of a fund manager. This however requires a higher level of expertise and a larger minimum investment.

Access to information in private markets is more challenging than in public markets. GPs often rely on their own resources and network to find attractive investment opportunities. The better the ability a manager has to gather information and formulate an investment thesis, the better chance they have to spot rewarding investment opportunities. There is also no continuous market or valuation for these assets and the transactions require time to negotiate and execute. The potential for mispricing exists because many investors do not have the necessary knowledge, patience or information to evaluate, invest, and help realize the intrinsic value of these assets.

In all cases, investing in private markets requires time. In public markets, investors often can easily access their investments and realize returns by month, quarter or year. Because private market funds aim to transform companies or projects over the course of years, investors need to be willing to lock up their capital for longer. For private equity funds, for instance, this could be for 10-years or more.

For more on private markets strategies, risks, returns, and performance, see An introduction to private markets , 18 October, 2023.