Private markets in many ways are the final frontier for everyday investors.
On one hand,
A handful of firms have been trying to mitigate those drawbacks while bringing the often lucrative benefits of
On Monday, the wealth management giant announced what it's calling its Private Markets Transactions Desk. Kevin Swan, Morgan Stanley head of private market solutions, said the new offering grew out of a realization that there are a sizable number of clients who have ownership in private companies and may be looking for ways to turn that equity into cash.
Sitting on the other side of these potential deals are Morgan Stanley investors seeking ways to put their money into private markets. What the new transaction desk does is set up an internal market within the firm allowing these two types of clients to trade with each other.
"This is a classic situation where there is demand on both sides of the market and we're trying to play a role to meet that demand," Swan said in an interview.
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Private opportunities outpacing public
The consulting giant McKinsey
Swan said the Morgan Stanley clients who will sell through the new Private Markets Transaction Desk are mostly investors who used their assets as seed money to help private companies get their start. In previous decades, the payout for such "venture capitalists" would tend to arrive when the business they had invested in held an initial public offering, or sold stock on public exchanges.
Recent times, though, have seen private businesses become far more reluctant to go public.
There are a variety of reasons for that, Swan said. For one, he said, startup founders are often reluctant to cede control to shareholders. Economic conditions such as high interest rates have also helped make IPOs fairly rare events. And the flood of money coming into private markets has meant owners can go longer without turning to public investors for capital, Swan said.
Mike Gaviser, the head of private markets at Morgan Stanley Wealth Management, said the days are gone when early investors in a company like Amazon could expect a quick payout for taking an equity stake in a startup. Amazon held its IPO in 1997, only three years after its founding.
Contrast that with a company like SpaceX, the private spacecraft builder founded by the billionaire entrepreneur Elon Musk in 2002. Many investors have been clamoring to buy a piece of it. But Musk has suggested he's quite happy to
Citing data from the private market tracker
Gaviser said there are a good number of Morgan Stanley clients who made early bets on such startups are now eager to turn their equity into cash.
"They're saying, 'Hey, this is great. But you know, I invested a while ago and I'd like some liquidity,'" Gaviser said. "And that's where access to these types of products or processes actually becomes incredibly relevant."
Private markets for all?
Morgan Stanley's Private Markets Transaction Desk is only on offer to Morgan Stanley clients. Still, as it gives investors new ways of buying into private equity, it comes as a part of a larger movement to bring private markets to a broader swath of the public.
Many private investments are now open only to so-called
Proponents of further democratization of private markets tend to note how returns from private equity and credit have outpaced such benchmarks as the S&P 500 in recent years. In a report released on Thursday, the private markets investing firm Hamilton Lane noted that $1 invested in 2018 would be worth $2.38 today had it been put in private equity and $1.57 if it were in private real estate. The same dollar invested in stocks would be only $1.50, barely beating the $1.49 it would be worth if put into private credit.
Hamilton Lane argues private markets continue to be bedeviled by notions that they are too opaque and too difficult for investors to pull their money out of. Stephen Brennan, the head of private wealth solutions at the firm, said brokers in the private market have been trying to combat those perceptions by improving their products.
Largely gone, for instance, are the days when investors in vehicles like private REITs had to wait as long as 10 years to get their money out. Many products now on the market let investors withdraw a certain percentage of their money at set intervals — often as frequently as once a month.
Liquidity can still be restricted by "gates" limiting on how much can be taken out in a given quarter. The Blackstone Real Estate Investment Trust, or BREIT, will put up its redemption gates when 2% of the money held in its real estate investment trust is taken out in a single month or 5% in a given quarter.
Brennan said Hamilton Lane has two "flagship" private equity funds with similar features managing roughly $6 billion in assets. The key for anyone considering investing in these vehicles is to recognize that they're meant to be for the long term. Although they may be easier to pull money out of than they had been in the past, they are still less liquid than public stock and bond markets.
"That's probably the most important thing that people need to be comfortable with," Brennan said. "This is not something that is meant to be traded in and out even though you may have the option to invest more or take some liquidity."
Persuading advisors
Brennan said one of Hamilton Lane's goals is to work more closely with advisors to help them better understand the potential benefits of putting clients in private markets. The firm's website contains a
"I think generally the accessibility will increase as the education and the level of comfort with these asset classes improves broadly," Brennan said.
Some advisors attest to not needing any additional convincing. Scott Bishop, a partner and managing director at the Houston-based advisory firm
He said he understands how some might see such diversification as an unnecessary risk when both the public stock market and cash investments continue to produce strong returns. The S&P 500 is up more than 8% so far this year and money markets and high-yield savings accounts are still yielding around 5% annually.
The trouble, Bishop said, is that public markets have become ever-more correlated, meaning they tend to move up and down in lockstep. That's even true of the bond market, which used to be thought of as a hedge against plunging stock values but took a bath alongside the S&P 500 in 2022.
Granted, Bishop said, investors need to do careful research — often with the help of an experienced advisor — before putting money into private markets. Some of these funds come with relatively high fees that will eat into returns.
"But the fact is, the private investments with the best managers outperform over the long run," Bishop said.
Growing market
Morgan Stanley is far from the only firm to try to make investing in private markets a little easier. Other firms like
Jacob Mohs, the founder of the private market trackers Interval Fund Tracker and Alternative.Investments, said he thinks there's room for even more entrants.
"It's a very inefficient market, and there is a lot of pent-up demand for equity in so many of these unicorns that have not gone public," he said.
Gaviser and Swan said Morgan Stanley's intention isn't necessarily to compete with those companies. Rather, they said, the idea is to make sure the firm's clients both looking to sell and buy private investments can obtain the same benefits in house.
"To our knowledge there's no one that has a larger institution like ourselves that has stepped in to try to institutionalize a solution to address this demand on both sides of the market," Swan said.
