One term you may have heard mentioned recently is the “denominator effect” and its impact on private markets.
As a quick primer, nearly every institutional LP operates within a target allocation framework for various asset classes (e.g., 20% to private equity, 20% to real assets, 40% to public equity, and 20% to fixed income). When the stock market declines dramatically, the public market investments fall in value immediately, while the private market investment values will not be impacted for several months (if not years).
This leads to the total portfolio (the denominator of the equation) decreasing and the private market investments of the portfolio being a more significant portion of the total, leading to rebalancing where they are over-allocated. This emerging dynamic among institutional LPs creates two positive impacts for individuals:
- As some institutional LPs hold on making new commitments, this allows new entrants to invest in access-constrained funds, especially when GPs have come back to the market with more significant funds.
- When an institutional LP needs to rebalance and exit a portion of their private market portfolio, this likely comes with a deep discount from the most recent net asset value, creating a compelling opportunity in secondary markets.
The full impact of these dynamics may take some time to be realized, but the long-term outlook for those entering the market now is positive.
-Logan Henderson, Founder and CEO
Worth a Read
Why You Shouldn’t Pick Your Own Stocks… or Private Investments
As Warren Buffett puts it, “I don’t think most people are in a position to pick single stocks.” Read more.
How to Use Risk and Return to Select a Fund
Index funds provide instant diversification and can help to reduce the overall risk of your investment portfolio. Read more.
A Final Thought
According to Goldman Sachs, a seismic shift is occurring in the private market investor base, from 5% to 8% of the $10 trillion market today to 20% to 30% of new capital coming from individual investors over the next few years.
An efficient global distribution model is needed to enable this shift and create a new synergy between investors and allocators.
Our approach is to provide a curated selection of private market funds with lower capital minimums and fees, enabling individuals to realize the returns historically reserved for institutional investors.
Let us know what you think – please don’t hesitate to reach out.
-The Team at Gridline