Private Investments are diversifiers
There are just four investable asset classes for your serious money: stocks, bonds, cash and real estate. Everything else you have is either hair-splitting exercise or a derivative.
What led to the explosion of the Private Equity and Debt Markets?
1n 1999 there were around 4000 publicly traded securities. Today there are around 2000. What happened? This shrinking of public capital markets occurred because of a piece of legislation you might remember called Sarbanes-Oxley. Go back and watch the movie “The Smartest Men in the Room” for a refresher. Enron, Ken Lay, Jeff Skilling. Sad stories all. Their sins were vanquished from the US Capital Markets from this legislation Sarbanes Oxley or more formally as the Public Company Accounting and Investor Protection Act.65
You have heard the flashy term “Money Never Sleeps,” right? Well an industry that was in the cottage phase prior to 2002 got a major boost by Sarbanes Oxley. The Private Equity industry. Are the onerous filings demanded by “Sarbox” too much for your company? Go private. Are you a growing company with vision of being publicly traded? Slow down there, big fella. Stay private for a while longer.
Private Investments Don’t Fit on Markowitz’ Diversification graphs
With this background in mind, let’s refocus our attention on the investor. When Dr. Marcowitz did his seminal work in the 1950s, there were likely private individuals that invested in private companies, but these were not the focus of his paradigm-shifting research on diversification. This is simply because private firms simply are not valued on a daily basis, are not liquid and finally as a result of this did not show up on his chart of an efficient frontier. Private firms aren’t valued daily, lack liquidity, and therefore didn’t appear on his efficient frontier chart.
Fast forward fifty years and numerous changes in business financing and the private equity and debt businesses are both robust and actively invested in by Americans of a certain income or net worth
