Differences of Private vs. Public Equity

Picking between private and public equity can play a key role in shaping your portfolio strategy. Public equity offers easy access to market information and the flexibility to quickly buy or sell shares. Private equity investments, on the other hand, can involve more in-depth research and due diligence, as they are typically less regulated and less transparent. A financial advisor can work with you to analyze both types of investments for your portfolio and help you manage the risks.

How Does Private Equity Work?

Private equity investment pools funds from high-net-worth individuals and institutional investors to acquire stakes in private companies. Unlike public markets, where shares are traded openly, private equity investments are typically made in companies that are not listed on stock exchanges.

The goal of a private equity investment is to improve the company’s value over time through strategic management, operational improvements and sometimes restructuring, before eventually selling the stake for a profit. This process can take several years, during which the private equity firm works closely with the company’s management to drive growth and enhance profitability.

Private equity firms are responsible for raising capital, identifying potential investment opportunities and managing the acquired companies. These firms often supply expertise and other resources to help companies they invest in reach growth targets. This assistance can involve anything from providing strategic guidance to implementing cost-cutting measures or expanding into new markets. The ultimate aim is to exit the investment at a profit, typically through a sale or an initial public offering (IPO).

Investing in private equity can offer higher returns but it also comes with more risk. Private equity investments are generally illiquid, meaning they cannot be easily sold or exchanged for cash. Additionally, success rests on the ability of the private equity firm to effectively manage and grow the companies in their portfolio. Investors considering private equity must conduct thorough due diligence and many work with a financial advisor to help navigate the complexities.

How Does Public Equity Work?

Public equity refers to shares of a company that are traded on public stock exchanges, such as the New York Stock Exchange or NASDAQ. Companies become public by offering shares to the general public through an initial public offering (IPO). This process allows the company to tap a broad pool of investors for capital to use for expansion, research and development or other business needs.

For investors, public equity provides an opportunity to own a piece of a company and potentially benefit from its growth and profitability. The value of these shares fluctuates based on market conditions, company performance and investor sentiment.

Public equity markets play an important role in the economy by facilitating the flow of capital between investors and companies. These markets provide liquidity, enabling investors to buy and sell shares with relative ease. This liquidity is essential for maintaining investor confidence and ensuring that companies can access the funds they need to grow.

Public equity markets provide transparency because publicly traded companies are required to disclose financial information regularly. This helps investors make informed decisions and contributes to the stability and efficiency of the financial system.

Investing in public equity can be an effective way to build wealth over time, but has its own risks as well. Share prices can be volatile, especially in the short term, as they are affected by influences including economic conditions, industry trends and geopolitical events. To mitigate risk, investors often diversify portfolios by investing in a mix of stocks across different sectors and regions.

Important Differences Between Investing in Private or Public Equity

A woman reviewing her investment portfolio.

Each approach to equity investment has its own characteristics, risks and opportunities. Here’s a breakdown of seven key differences to consider when investing in private or public equity.

Accessibility: Public equity is traded on stock exchanges, making it easily accessible to individual investors. Private equity involves investing in companies not listed on public exchanges, often requiring significant capital as well as connections that can be hard to develop.
Liquidity: Public equity offers high liquidity, as investors can buy and sell shares quickly. Private equity investments are typically long-term, with funds locked in for several years.
Regulation: Public companies are subject to strict regulatory requirements and must disclose voluminous financial information. Private companies have fewer regulatory obligations, so investors often know less about what they are getting into.
Transparency: The transparency of public equity can help investors make more informed decisions based on available data.
Potential returns and risks: Private equity often targets higher returns, but has higher risks due to less liquidity and transparency. Public equity returns are generally more stable but can be influenced by market volatility, especially in the short term.
Investment horizon: Public equity investments can be short-term or long-term, depending on market conditions and investor goals. Private equity typically requires a long-term commitment, with a focus on value creation over several years.
Investor influence. Investors in private equity often play an active role in company management and strategy. At best, public equity investors have much more limited influence on how companies are run and are generally along for the ride.

Bottom Line

An investor analyzing investments for his portfolio.

Public equity involves buying shares of companies listed on stock exchanges, which can provide liquidity and transparency due to regulatory requirements. Private equity, on the other hand, is an investment in privately held companies. This usually requires a longer-term commitment and may offer higher returns, but these investments are also less liquid and carry more risk.

Investment Planning Tips

A financial advisor can help you decide between private and public equity investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to balance your portfolio, SmartAsset’s asset allocation calculator can help you match assets to your risk tolerance and investment horizon.