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What is the difference between public and private markets, and why does it matter? These represent two distinct avenues – not just for investors, but also for companies looking to raise capital.
In this article, we explore the core features of public and private markets and how they can affect strategies for UK investors and businesses.
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UK public & private markets: an overview
In the UK, a public company is one which trades its shares on a recognised domestic stock exchange. The most famous is the London Stock Exchange (LSE), which started in 1801.
As of March 2022, the market capitalisation of the LSE stood at $3.57 trillion. This is certainly impressive, yet it is eclipsed by public exchanges in the US.
Together, the New York Stock Exchange (NYSE), Nasdaq Stock Market and OTCQX U.S. Market represent over $40.5 trillion in market capitalisation.
Every public exchange is different such as varying listing requirements, number of listed companies and total value.
The London Stock Exchange (LSE) comprises many important parts, such as its subsidiary the FTSE Group which maintains the FTSE 100 Index.
By contrast, a private market offers investments not available on a public exchange. This is a broad umbrella term encompassing many asset types such as private equity, venture capital (VC) and hedge funds.
Private markets are typically more exclusive than public ones, involving a higher barrier to entry in wealth. For instance, before you can engage in angel investing in the UK, you must provide proof that you are a certified Sophisticated Investor.
Not all investments fall neatly into these categories in the UK. In particular, the Alternative Investment Market (AIM) is technically “public” in that it is a sub-exchange run by the LSE. However, the regulations are more flexible and companies are comparatively small, giving it more features of a “private” market.
UK public & private markets compared
One of the biggest differences between UK public and private markets is regulation. To be accepted on the main LSE, companies need to comply with very strict requirements.
By contrast, the AIM operates on a “comply-or-explain” model, which lets companies comply with the relatively low number of rules – or, give a reason why they are not.
Public companies must engage in frequent financial reporting, disclose material events and appoint an external team of advisers for the IPO (initial public offering).
Private companies are not allowed to offer shares to the general public (Companies Act 2006). However, they otherwise have a lot of regulatory freedom.
For instance, you need at least one member, one director and a company name to form a limited company. You must also have a registered office address and a service address.
From here, a private company can approach investors relatively freely to ask for funding. They might do this via crowdfunding, a bank loan or angel investing.
This starts to show another key difference between UK public and private markets – i.e. the types of investors they attract.
Public markets are open to a wide range of investors such as pension funds, institutional investors and individual (“retail”) investors. The latter can buy company shares directly via an exchange or indirectly by “pooling” their money together with other retail investors using a fund.
Private markets are mostly dominated by institutional investors (e.g. private equity firms) as companies progress through their funding stages.
Earlier on, however, Sophisticated investors are more involved – e.g. angel investors providing startup funding in exchange for an equity stake.
A final difference between public and private markets is the risk-reward ratio.
Public markets tend to heavily feature companies which are “lower-risk” (e.g. due to building up a dominant position in their industry), yet may offer lower potential returns.
By contrast, private markets will often feature younger companies which have a lot of growth potential. Yet the risk of failure is higher.
How do I choose my investments?
Your financial goals, circumstances and risk tolerance all play a key role in determining the suitability and balance of public and private investments in your portfolio.
For instance, if your primary goal is investment growth and you are prepared to take on more capital risk, then private companies may feature more prominently in your choice of assets.
Conversely, if you are very risk-averse and want to preserve your wealth, using it to draw an income (e.g. in retirement), then you may lean towards “safer” public stocks which have a stable track record regarding share price and dividend payments.
Your tax position may also affect your investment strategy. For example, if your wealth is threatened by UK inheritance tax (IHT), then investing in companies which qualify for the Enterprise Investment Scheme (EIS) could be an option.
Here, your EIS shares are exempt from IHT if held for at least two years. However, EIS investing carries a higher level of risk compared to other investments. It is not for everyone.
Seek professional financial advice to explore the best options for building a tailored investment portfolio.
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