Private market investments provide unique opportunities for investors to directly impact the growth trajectory of their investments, potentially leading to higher returns. Let’s explore the concept of endogenous growth, its relationship with private market investments, and how investors can benefit from this economic phenomenon that is often unattainable through public market investments.
Endogenous growth theory and neoclassical framework
Endogenous growth theory highlights the importance of human capital, innovation, and technological advancements as drivers of long-term economic growth. Unlike neoclassical growth theory, which relies on exogenous factors, endogenous growth theory underscores the significance of knowledge spillovers and increasing returns in R&D.
Private market investments, by nature, channel capital into innovative companies developing new technologies and intellectual properties. This approach accelerates endogenous growth while also creating a symbiotic relationship between the private sector and the broader economy.
A Look at the Evidence
The empirical evidence supporting the connection between private market investments and endogenous growth is both robust and varied.
Harris, Jenkinson, and Kaplan (2014) conducted a comprehensive study demonstrating higher returns on private market investments, revealing that private equity investments have consistently outperformed public market equivalents by 20% to 27% over a fund’s life. Private markets' long-term alpha generation potential is evident from their analysis of 1400 private equity funds and their underlying investments.
Additionally, private market investments play a significant role in fostering innovation. Kortum and Lerner (2000) found that an increase in venture capital investments directly led to an increase in the number of patents. This finding highlights the importance of private market investments in driving endogenous growth through innovation.
Another key aspect of endogenous growth is employment generation and productivity enhancement, both of which have been linked to private equity investments. In their study, Davis et al. (2014) discovered that private equity-backed companies experienced a significant increase in employment over a five-year period, outperforming their non-private-equity-backed counterparts. Moreover, Boucly, Sraer, and Thesmar (2009) showcased that French companies bought out by private equity exhibited an annual productivity and profitability growth premium.
Lastly, private market investments can also catalyze endogenous growth through spillover effects on the broader economy. An increase in venture capital investments leads to a rise in entrepreneurship, spurring job creation and income growth in the broader economy. This underscores the potential of private market investments to contribute to endogenous growth through knowledge spillovers and human capital development.
Accessing Private Market Investments
While the benefits of private market investments are clear, historically, they have been limited to sophisticated family offices and endowments.
Thanks to digital platforms like Gridline, a first-of-its-kind digital wealth platform, individual investors can now access top-performing alternative asset managers in a fully digital experience, allowing them to build diversified portfolios within minutes and capitalize on endogenous growth.