Unlocking Wealth: How Young Investors Are Diving into Private Markets
When it comes to investing, time is your greatest ally. The longer you plan to invest, the more room you have to dive into stocks. But here’s a surprising twist: a recent survey reveals that high-net-worth individuals aged 43 and under are putting a mere 28% of their portfolios into publicly traded stocks. That’s about half the percentage of their older counterparts! Meanwhile, Gen Z and millennials are taking a different route, channeling 17% of their investments into alternatives like private equity—three times more than Gen X and baby boomers. What’s behind this trend?
It’s easy to chalk it up to emotional factors. Some speculate that younger investors are fleeing traditional equities in search of potentially higher returns in cryptocurrencies and other alternatives. Others suggest that they’re simply too cautious, given the tumultuous events they’ve witnessed over the years. But let’s cut through the noise—there’s a straightforward, logical reason for this shift that aligns perfectly with the principles of smart investing.
Why Young Investors Are Turning to Private Markets
It’s no surprise that younger investors are gravitating towards private market investments. With longer investment horizons, fewer immediate liquidity needs, and a higher risk tolerance, they are ideally positioned to seize opportunities in longer-duration assets, which usually deliver better returns than traditional stocks.
Historically, average investors had limited access to private equity, which was once the playground of institutional investors. This resulted in a hefty reliance on public stocks. Remember the 1990s? Twenty-somethings back then might have felt comfortable pouring 80% of their portfolios into equities, with the luxury of nearly 8,000 listed U.S. companies to choose from. Fast forward to today, and that number has shrunk to under 4,000 public stocks. In contrast, there are over 17,500 private firms raking in more than $100 million annually, now accessible through funds geared towards private equity and other alternative assets.
Younger investors have a knack for embracing new asset classes and innovative investment strategies—think cryptocurrencies, ETFs, robo-advisors, and impact investing. Now, private equity, private credit, and private infrastructure are entering the scene, being made accessible through user-friendly investment vehicles like interval funds. These SEC-registered, ‘40 Act funds are as easy to buy as mutual funds, offering daily pricing with periodic liquidity. Talk about a game changer!
A Shift Towards Active Management
Millennials and Gen Z have grown up in a world dominated by passive investing—the idea being to simply own the market without sweating the details. Yet, the past few years have shown us that passive strategies can falter in the wake of market upheavals, like the global financial crisis and the COVID-19 downturn. Today, most passive investment gains are heavily tied to a handful of mega-cap tech stocks, prompting a reevaluation of the best ways to diversify a portfolio.
This environment is prompting younger investors to rethink active management—but within the realm of private markets. Three decades ago, active management was the standard approach, where the average market value of publicly listed companies was only $1.8 billion. Now that number has ballooned to over $7 billion, edging closer to large-cap territory. The last time active management reigned supreme was when public stocks were smaller, and information was scarce, leading to greater variations in returns and opportunities for savvy investors to exploit information gaps.
So where did all those smaller companies go? Many were gobbled up through mergers and acquisitions or have chosen to stay private. Today, roughly eight out of ten middle-market companies—those with annual revenues between $10 million and $1 billion—remain elusive and private. These entities contribute over 30% of private-sector GDP and employ nearly 48 million people, representing over a third of private sector payrolls.
Moreover, privately owned businesses have experienced significantly better revenue growth than the S&P 500 in recent years. This shift towards long-term financing of robust companies could explain why, comparatively speaking, private markets have outpaced public markets over time.
Empowering Investors Through Education
As history suggests, young investors are poised to increase their stakes in private markets as they become more informed—just like the evolution of ETFs. Nearly two decades ago, ETFs managed only $300 billion; now, they’ve skyrocketed to over $8 trillion in net assets.
This trend toward private investments presents an unprecedented opportunity for financial advisors. With the great wealth transfer from Baby Boomers to younger generations, who are increasingly warm to alternative investments, advisors must grasp the private market narrative and be ready to educate clients.
The goal of this educational effort should be clear: it’s not just about adding another asset class to diversify a portfolio. It’s about investing in uncorrelated assets that have historically outperformed over the long haul and can enhance the overall risk-adjusted returns of a portfolio. This message must emphasize that private markets mirror where public markets were 30 years ago—when investment options were plentiful, information was less accessible, and where active management and diligent research truly mattered.
Let’s embrace the future of investing—where knowledge is power, and opportunities abound!
