Efficiency in the Public and Private Markets

The private market has historically outperformed public ones for a single, simple reason. Private markets are just that — private. Because they’re private, these markets are inefficient and full of opportunity.

Efficiency in financial markets is impacted by many factors, but highlighting just a few main ones is sufficient to bring out the difference between public and private markets. A market’s efficiency is determined largely by the:

  • Number of people participating in the market
  • Ease or difficulty with which transactions are made
  • Availability of relevant information
  • Liquidity of the market’s assets

A market where lots of people participate, transactions are easily made,  information is readily available and assets can be sold quickly is likely efficient. A market with few participants, high transaction barriers, insider information and illiquid assets will have inefficiencies.

The stock market, of course, is a public market and it’s an excellent example of one. Millions of people and organizations participate in the stock market, transactions are completed instantly and with minimal commission, and details for each available stock are readily available.

In contrast, the commercial real estate market shows what a private market looks like. Many fewer people participate in the market, while high initial costs and time-consuming transactions create investment barriers. There’s also lots of information that the average investor doesn’t have, including both the knowledge needed to assess assets and the networks needed to know when assets become available. Most commercial properties aren’t widely advertised when they’re for sale.


Opportunities Lie in Market Inefficiencies

In markets, inefficiencies are where opportunities can be found and above-average returns can be made.
In an efficient market, assets are generally properly priced for their return and risk. Even experienced investors can struggle to beat efficient markets, because everything in the market runs smoothly. When there aren’t inefficiencies, there aren’t opportunities to make improvements — or increase return rates.

In contrast, inefficient markets present many opportunities to attain above-average rates of return. Only investors who have enough financial capital to invest are able to participate in the market, and only those who have the required knowledge and network will find the opportunities that will likely provide above-average returns. It’s the investors that have the combination of capital, knowledge and network who really can take advantage of the opportunities that private market inefficiencies present.


Liquidity Comes at a Premium

The liquidity of efficient markets, such as the stock market, is a major attraction for some investors. Being able to sell assets at a moments notice comes with a premium in the form of lower returns, however. While some investors may take advantage of the liquidity, many that use a buy-and-hold strategy never do.

Investors who are willing to sacrifice liquidity can often see higher returns in the private market because they have more opportunities.


Investing in the Private Market

Large investors, such as institutions and family offices, have been taking advantage of the opportunities that inefficient private markets present for a long time. These investors frequently have over half their capital tied up in private-market investments, and it’s mostly these investments that account for the high returns that pensions, endowments and private equity firms are able to generate. It hasn’t been until recently that developments in financial technology have given individual investors access to the major private markets.

The Marcus family is one of those family offices that has been taking advantage of private market investments for years. They’re now using the advancements in fintech to bring these opportunities to individual investors. To learn more about how you can take advantage of the private market, contact the team at Marcus Investments.


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