Private equity or venture capital is an asset class that large investment institutions have formally embraced as part of their portfolios for the past 50 years. Among institutional investors, it’s no secret that high-quality private equity deals provide an excellent long-term return on investment as well as significant portfolio diversification characteristics.
The two principal components of venture capital investing are focused on venture strategies and buyout opportunities. The growth of assets available to fund smaller fast-growth private companies has been the principal focus of venture capital investors for the past decade. The surge in the flow of dollars into the private equity or venture capital arena has been stunning over the past decade.
The opportunity to earn high returns from getting in on the ground floor of new ventures, particularly those with the new economy at their core, has attracted much of this capital. Many of these venture capital opportunities will ultimately find their way into the public markets as a source of liquidity for the venture capital community.
Even though the stories of high returns have gained the attention of investors and the public, the information available on private equity deals continues to be elusive. As the name connotes, information about private equity returns and asset values is typically private and, as a result, difficult to obtain and relatively unreliable. Compare this with the public markets, particularly large capitalization stocks, where disclosure is broad and liquidity is good. This public/private information disparity makes it difficult to draw comparisons of public and private assets. However, there are many similarities between private equities and the micro cap market, where the flow of information and liquidity are much more modest and resemble those of private investing rather than large cap investing. The similarities in information flow and liquidity create a linkage between the private equity market and the micro cap market.