Time to study broadening of private market access
THE very wealthy are getting wealthier, even after adjusting for their rapidly rising cost of living. Access to private markets might be helping them cement this lead.
Data from Forbes this month showed that the world’s billionaires are worth a record-breaking US$14.2 trillion – up US$2 trillion from the 2023 stocktake, and US$1.1 trillion above the previous record set in 2021.
The Financial Times went a step further to compare the increase in wealth with Forbes’ “cost of living extremely well” index.
Although this wealthy-living index – which includes catered dinners and bespoke shirts – is rising faster than the US consumer price index, its increase is still less than the increase in the net values of the wealthy.
One reason the rich can continue to grow their wealth is that they have the necessary disposable income to continue investing in both up and down markets. Time in the market is more important than timing the market, and the rich can afford to do the former (as well as the latter).
Bankers speaking to FT also suggested that ultra-high-net-worth individuals have access to a diversity of uncorrelated asset classes – private equity, private credit and infrastructure, for instance – that have done well in recent years.
These bankers have a vested interest in promoting the benefits of such assets; so their conclusions should be tested before they are accepted. Nevertheless, as public markets dry up, it might be time to consider whether these private assets should be made more accessible.
Public markets globally are shrinking. Jamie Dimon, chief executive of US bank JPMorgan Chase, noted in his annual shareholder letter this year that the number of publicly traded companies in the United States has fallen from 7,300 in 1996 to about 4,300 today.
The shrinkage, Dimon said, was partly attributable to private equity funds buying up public entities.
This trend is visible across various markets. There were 2,700 companies listed on the London Stock Exchange in 1996, according to Schroders, versus 1,100 at the end of 2022.
Singapore investors have seen the same phenomenon on the local exchange: there were 632 listed companies in Singapore at the end of last year, according to Monetary Authority of Singapore data, down from a peak of 778 in 2010.
This shrinking of public markets is coinciding with a concentration of outperformance at the top end of the market, making the universe of attractive stocks even smaller.
The S&P 500 index appears to have performed well in recent years, but this is thanks to just a handful of counters.
The so-called Magnificent Seven stocks – comprising Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft, and Tesla – accounted for roughly two-thirds of the S&P 500’s 2023 returns, according to Dow Jones Market Data.
A portfolio consisting solely of these seven stocks would beat many global stock and inflation indices, but would also expose investors to significant concentration risk.
None of these arguments, on its own, is a sufficiently strong justification for the idea of giving retail investors a chance to invest in private markets. These are, however, good reasons to begin studying the pros and cons of a democratisation.
Market structures, volatility measures and risk levels for various asset classes have evolved significantly in the last decade, and public equity investing has lost some of its lustre. There may be cyclical rather than structural reasons for this. We won’t know for sure until we devote some serious resources to studying the matter.
