How to Invest in a Private Company
Traditionally, individual investors interested in accessing private company deals have done so through private equity and venture capital funds, which allow investors to gain exposure to a diversified4 portfolio of private companies via a professional investment manager.
In recent years, however, qualified wealthy individuals and family offices have gained greater access to private market opportunities once exclusively reserved for large institutional investors. Here are two key approaches worth considering:
Co-Investments
How does it work? Typically, co-investing opportunities arise when general partners in private equity funds want to raise additional capital into their portfolio companies.
For investors who qualify, this approach can deliver a range of benefits:
- Co-investments may offer attractive return potential and can complement other investment strategies in your portfolio.
- Co-investment opportunities are often offered with low or no fees, which may translate to better net returns.
- Relative to alternative investment funds which are generally blind pool investments, co-investing may offer greater transparency, as investors will know what company they are committing their capital to in advance.
- Finally, multiple layers of due diligence add to the appeal of co-investing, as these deals are often rigorously pre-screened in accordance with the investment manager’s strategy and investment process.
Secondary Market Transactions
Another approach worth considering is buying individual securities of private companies on the secondary market. Whereas co-investments may involve raising new capital to fund individual private companies alongside a private-equity fund manager, secondary market transactions typically involve buying or selling previously issued securities in private companies. For example, an employee of a startup might decide to sell their equity-compensation shares to a private investor if they need liquidity before the company goes public or is acquired; a secondary-market platform that specializes in such transactions can assist in facilitating the sale.
For sellers, secondary-market transactions offer the ability to monetize their investment before a company’s exit event, such as an IPO or acquisition. Buyers, meanwhile, get the opportunity to invest in a potentially high-growth private company before it goes public, which may lead to attractive returns and possible portfolio diversification benefits. What’s more, as with co-investments, buyers in secondary transactions know exactly what company they’re considering investing in and, thus, have the opportunity to perform due diligence beforehand.
Making Informed Investment Decisions
If you’re considering investing in private companies, remember that while very attractive for investors pursuing excess risk-adjusted returns, investing in private markets can be complex and may require a broad skill set as well as deep relationships and resources to properly source opportunities, perform due diligence and monitor investment performance.
Keep in mind, too, that private market investing generally requires a longer time horizon than public market investing, which may have an impact on the overall structure of your portfolio.
“As a larger percentage of capital formation and economic growth is occurring in the private markets, we aim to continue to work hand-in-hand with all of our clients to source and facilitate these opportunities to create lasting value,” said Michael Gaviser, Head of Private Markets, Morgan Stanley Wealth Management.
Morgan Stanley Private Markets has the resources, reputation and relationships that can help connect private market participants to vast opportunities. Morgan Stanley Private Markets offers a curated range of co-investment offerings of high-quality private companies across a variety of asset classes, industries, geographies, investment stages and sources, with lower minimums than many competitors.
Also part of Morgan Stanley’s broader Private Markets ecosystem, the Private Markets Transaction Desk is a concierge service for clients looking to buy or sell individual private-company securities of eligible U.S.-based private companies, with institutional-caliber execution and lower transaction fees than many competitors.
Connect with your Morgan Stanley Financial Advisor or Private Wealth Advisor to see if private market investing and other alternative investment strategies may be right for you. Morgan Stanley’s unmatched global network offers a broad range of potential opportunities in private markets. Your Morgan Stanley Financial Advisor or Private Wealth Advisor can help you implement private market solutions, potentially with lower investment minimums, to help you seek returns and portfolio diversification.
To learn more, ask your Morgan Stanley Financial Advisor or Private Wealth Advisor for a copy of the Global Investment Manager Analysis report, “A Tug of War: Public Versus Private.”
