There has been a lot of discussion about private market valuations and whether they reflect current fair value. The SEC’s recent Private Markets Roundtable highlighted this issue, focusing on the processes private fund managers use to determine net asset values (NAVs) compared to the observable prices in public markets. While important, the valuation debate can miss a larger point: private markets involve negotiated transactions with longer expected holding periods – not frequent trading.
Private market investing is built around long-term ownership. For equity investors, value creation often occurs at inflection points and depends on operational improvements, growth initiatives, and strategic repositioning of their companies or assets. For debt holders, returns depend heavily on upfront origination, underwriting, and structuring, as well as on active monitoring. These are not strategies intended for investors to move in and out based on short-term market sentiment.
When Liquidity Changes Investor Behavior
Semi-liquid vehicles, such as non-traded BDCs, REITs, and interval funds, have expanded access to private markets while providing investors with periodic liquidity. However, as these products become more prevalent and as fund NAVs receive greater attention, a fundamental shift may occur. Investors may begin to treat private assets as tradable securities rather than long-term investments, undermining the value proposition of investing in private markets.
This shift can erode investors’ long-term returns. For example, during periods of market stress, investors in semi-liquid funds may seek to redeem, potentially exiting before the underlying value of investments is realized. They may also subscribe to hot strategies, unaware that much of the value creation has already been realized.
While private market investors can benefit from greater disclosures on how valuation methodologies differ, disclosure alone is insufficient. Individual investors also need more education on why these methodologies differ and on how to avoid excessive “trading” through frequent subscriptions and redemptions. Seasoned private market investors have benefited from the long-term outperformance of these assets. The risk for newer entrants focused on current valuation marks is that they lose sight of what drives returns in private assets.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.