The public markets are relatively easy: there is transparency with analyst coverage of stocks, listed company financials are disclosed, trading prices, multiples, and the various indices are all right in front of you on the screen. You could buy into a stock on one single investment thesis, and then get out the very next day. If your thesis played out the way you anticipated and you got the timing right, that stock investment could turn out to be extremely profitable for you. Sure, an institutional investor’s strategy would probably not be based on trying to time the market, but timing is an important element of buying public equities because it is so efficient and liquid.
But like football to cricket, the private markets are a completely different ball-game. Private equity is an illiquid asset class—that’s pretty much as opaque as it gets. Valuations and information are usually only available on a quarterly basis and delivered to investors with a one-month lag at best. Closed-end funds are 8, 10, or even 13 years in duration, longer than most economic cycles. Trying to time commitments and “invest at the right time” just doesn't work.
Build Your Investment Framework
Investing in the private markets is inherently a long-term endeavor given the fund terms involved, so an institutional portfolio should be sufficiently diversified across strategies to deliver upside returns regardless of if markets are favorable or in a slump. Similarly, diversifying across strategies should ensure downside protection in both market scenarios, and then steady liquidity across the board.
Using empirical evidence from a reliable, primary-sourced private markets database where the cash flow-based data is robust and accurate, investors can analyze and understand the differences between Small-cap, Middle-Market, Large, and Mega Buyout strategies. With this private market data, analysis in terms of returns and risk parameters such as default rates, financing structure, debt ratios, and pricing multiples is also greatly simplified. Likewise, a beta risk-adjusted alpha outperformance analysis can be performed on strategies (e.g., Venture Capital) to measure the alpha boost that can be achieved from an early stage Healthcare / Life Sciences strategy versus a later stage TMT strategy.
Then there’s liquidity: how different are the liquidity characteristics between Senior and Mezzanine debt, if any? How about when compared to Infrastructure? By quantifying the risk, return and liquidity characteristics of the various investment strategies and sub-strategies, an investment framework can be designed to be optimized for each of these parameters and for favorable, benign, and challenging market conditions.
Timing the market is not a strategy
Now the question, is relying on timing in the Private Markets a good idea? Nope.
While trying to select the right time to invest in a private markets strategy isn’t a realistic goal, nor a good way to guarantee returns, selecting the right fund managers to deploy the strategy is always a good idea. The one vital component of the selection process is due diligence. Analyzing a GP’s track record by fund vintage years and portfolio company investment years allows LPs to evaluate returns and risk across cycles, such as financing structure and deal pricing development over time. This enables LPs to understand GP investment and exit behavior across different market situations, which ultimately leads investors to decisions based on actual empirical evidence.
As William Arthur Ward once wrote, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” For LPs investing in private market funds, timing the market is not a strategy. Investing in the private markets requires a pragmatic and systematic approach, based on sophisticated analytics powered by innovation and verified primary-sourced cash flow private markets data.
CEPRES is the leading Invest-tech and Data Company for Private Markets. Through our digital solutions, we deliver the highest quality investment data and innovative analytics that empowers investment professionals to achieve better investment outcomes. CEPRES was the first to provide look-through analysis and the first to deliver multi-factor forecasting models for private equity funds. Today thousands of LPs and GPs connect and securely exchange investment data via CEPRES in the largest private market network in the world. Now encompassing over 8,500 funds and 88,000+ PE-backed companies worth $32 trillion USD.
CEPRES combines an award-winning, highly intuitive investment decision platform with the most secure digital investment network and a team of industry experts to provide an ecosystem to empower private market professionals. While maintaining full confidentiality and control of their data, CEPRES clients have access to a unique range of market intelligence and corresponding tools, streamlining Portfolio Building, LP Due Diligence, Portfolio Monitoring, Deal Comp analysis, and more—all, in one secure, customizable environment.