Private vs. Public Markets and How to Compare
When we talk about investing, two major categories often come up: private and public markets. While they both play critical roles in how capital flows and how companies grow, they operate in fundamentally different ways. Comparing the performance of a public stock to a private investment is often described as comparing apples to oranges because their numbers are calculated under totally different rules.
Understanding the differences between the two and their impact on the global economy, particularly in terms of risks and opportunities, is crucial, especially for long-term investors such as pension funds.
What are Public Markets?
Public markets are described as “liquid” markets, as there is an open marketplace for shareholders to dispose of or sell their shares at their own discretion when desired. Think of the stock exchanges like the New York Stock Exchange or NASDAQ, where millions of trades happen daily and prices fluctuate in real time.
Liquidity and transparency define the public markets, making them accessible to a wide range of investors, from everyday individuals to large institutions. Simply put, anyone with a brokerage account can buy or sell shares of these companies.
Public equity offers liquidity, transparency, and regulation, but it also comes with exposure to short-term market volatility and public perception.
What are Private Markets?
Private markets, on the other hand, operate outside of public exchanges. The primary difference from public markets is in how buyers and sellers access the market invest and raise capital. Instead of open trading, private investments are negotiated directly and often require significant commitments of time and capital. These markets are less liquid, less transparent, and typically open only to institutional investors or wealthy individuals.
Private capital markets, also referred to as private markets, encompass debt and equity investments in privately owned companies, as opposed to publicly traded assets, such as those found on stock exchanges, the bond market, and commodities markets. (S&P Global)
Private equity is one part of private markets, defined as capital investment into businesses and companies that are not publicly traded. Investors or private equity firms typically buy a significant or controlling stake in a company, with the goal of improving operations, scaling the business, increasing profitability, and eventually selling for a return. These investments are typically longer-term.
Key Differences at a Glance
Accessibility: Public markets are open to all investors, while private equity is restricted to institutional and high-net-worth investors.
Liquidity: Public stocks can usually be sold at any time, offering immediate access to funds. Private equity investments require investors to keep their money committed, often for years, before they can sell.
Transparency: Public companies are required to publicly report their financials and operations, providing detailed information to investors. Private companies disclose far less, giving investors limited visibility.
Control: Private equity investors have direct say in major company decisions. Public equity investors typically have little influence over management and strategy.
When comparing private equity to public markets, it’s less about “better vs. worse” and more about aligning with goals:
Time Investment: Private equity is a long-term investment that requires patience, while public markets allow for short- and medium-term strategies.
Risk and Return: Private equity may offer higher potential returns, but with higher risk and less liquidity. Public markets provide more stability and potential for diversification.
Impact and Stewardship: Pension funds and institutional investors in public markets can utilize their shareholder power to advocate for improved practices in climate, governance, and labor. In private equity, influence happens more directly within a smaller set of companies.
The comparison in the table below will provide additional insight on the distinct differences.
Why It Matters for Pension Funds
Pension funds often invest in both private equity and public markets. Public equities provide stability and liquidity, while private equity can deliver higher returns over the long term. But both must be weighed carefully against fiduciary duty, risk management, and broader systemic impacts, especially in the face of climate change and economic uncertainty. Striking a balance between the two is a critical component of protecting retirement security while driving sustainable economic growth.
Want to dive deeper? Check out our blog, Private and Public Equity Impact Pension Funds (April 3), where we break down these concepts further using a simple analogy—the exclusive club versus the community pool—and explore what they mean for public pension funds in the era of climate change.
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