“Sorry, Tim. We’d love to sell you shares. But there’s a line out the door waiting to buy them.”

It took a market crash for me to hit on the investment of a lifetime…

In 2011, the market was clawing its way back from the depths of the 2007 Great Financial Crisis.

By April 29, the S&P 500, Nasdaq, and Russell indexes had hit all-time highs of 1,363, 2,873, and 865, respectively. It seemed like the good times would keep rolling forever.

Then came August 8, 2011…

On that date, the markets crashed. The S&P 500, Nasdaq, and Russell plunged 18%, 18%, and 25%, respectively, from peak to trough.

Chart

Like today, the headlines were scary.

Europe was in the midst of a debt crisis. Global economic growth was uninspiring. And for the first time in history, the United States saw its credit rating downgraded.

Markets feared a double-dip recession was on the horizon. Investors lost trillions.

But those who knew where to look made a killing…

At the time, the hedge fund I co-managed had moved to private markets. We started the fund by purchasing private shares in a small company called Facebook.

You’ve probably heard of it.

The purchase served as our first move into the private markets… so we weren’t as early into the company as we would’ve liked.

But when Facebook went public in May 2012, most of our position quickly doubled.

After the big win, we sold some of our Facebook shares and sat on the capital, waiting to deploy it for the next opportunity.

While happy with our gains, we watched other managers – who got in earlier than us – net returns of 5x, 10x, and even more on Facebook. Next time, we wouldn’t be late for the party.

And I had the perfect date to bring with me…

Private Markets Offer Protection and Profits

You see, earlier in 2012, I had tried to add another private social media company to the hedge fund’s portfolio.

But every call I made was met with the same response: “Sorry, Tim. We’d love to sell you shares. But there’s a line out the door waiting to buy them.”

So, I waited… And waited…

The market continued to struggle. Like today, demand for growth, small-cap, and emerging market stocks completely dried up.

Then suddenly, one day in July, I got the call I’d been waiting for.

“Tim, we have shares available. Do you want them?”

“Yes!” I shouted.

Even though I knew better, I was so excited I didn’t even ask how many shares were available – or at what price.

I had already done my due diligence on the company. So I knew the opportunity was just that awesome.

What’s more, even though I could finally buy shares, the asking price had risen since I first tried to buy the company in March 2012.

That’s the thing about high-quality private companies.

Even though the public markets were dropping like a stone… shares in this private company were rising. But I didn’t care. I knew the upside was tremendous.

On August 6, only five days after the Russell 2000 saw one of its worst months in history, I signed the deal to purchase $2 million worth of private shares.

The company: Twitter.

At the time, Twitter had a value of around $9.8 billion. That may seem like a high valuation… but our fund was still early to the party.

By the time it debuted on the Nasdaq in November 2013, Twitter’s value had surged to $24 billion. That’s a 145% gain on IPO day.

By December 2014, Twitter had hit $36 billion – an almost 4x rise from IPO day. And it saw a peak market cap of $61 billion in March 2021.

Here’s why I’m telling you about my experience with Twitter…

As Daily editor Teeka Tiwari has pointed out, we’re in the midst of a “cyclical” bear market.

That simply means we’re experiencing a short-term selloff within a long-term, “secular” bull market.

And like I found out in 2012, bear markets can present incredible opportunities to make life-changing gains. Especially in the private markets.

Hedge Funds Are Building Private Company War Chests

During market drawdowns like we’re experiencing now, the “smart money” (hedge funds and venture capitalists) explores alternative investments for their capital.

They seek ideas that still offer explosive upside… but without worrying about daily price fluctuations.

That’s where private markets come in. They have unique traits that can insulate capital from volatility.

  • Unlike public companies, market swings generally don’t severely impact the share prices of private firms.

  • The best private companies have built up substantial war chests. They often use that money to buy distressed assets on the cheap. And I expect them to continue the same during the current conflict.

  • If the market stays volatile, companies can remain private until public offering conditions are more favorable. So private companies have tremendous flexibility.

  • Studies by research firms like Blackstone and KKR show that private companies not only outperform the S&P 500… they also have lower volatility than publicly traded companies. And they perform better during challenging times.

But don’t just take my word for it…

According to Fortune, more than 80% of VC and private equity firms say they plan to raise capital in 2022. That’s up from 75% in 2021.

And the amount of money they’re raising is increasing. In 2021, private equity funds raised at least $733 billion globally, surpassing every previous year on record.

Despite a slow start this year, they’re forecast to raise $952 billion.

So, while investors are selling out of the public markets, hedge funds and VCs are building their war chests to invest in private companies.

Take D1 Capital Partners, for example. The firm specializes in investing in a mix of public and private companies.

D1 recently released its monthly and year-to-date results. In May, the fund fell 4%. But while its public holdings fell 13%… its private shares were flat.

For the year, D1’s public market portfolio fell 44%… compared to an 8% drop in its private shareholdings.

That’s why Teeka and I believe every investor should have exposure to private markets.

Not only does investing in private companies generally outperform investing in public companies over the long run… History has shown private companies also do a better job at protecting your capital during bear markets.

Where to Get Started

Like Teeka, I’ve been covering the markets for years.

I’ve been through the dot-com bubble burst at the turn of the 20th century… and the Great Financial Crisis a decade later.

But I’ve learned that some of the best opportunities come when the markets are at their worst…

As we move into the second half of the year, the current market conditions should greatly benefit us.

Like what I experienced in 2012 and 2013, I think we’ll see more private companies look outside their close circle of investors and seek a broader audience.

So if you want to invest in these opportunities… you can search for private deals on crowdfunding platforms like Republic.

They list dozens of startup companies raising money from the general public. In some cases, you can start with as little as $50.

But be sure to diversify your positions and treat these investments like speculations… So don’t bet more than you can afford to lose.

Regards,

Tim Collins
Co-Editor, Palm Beach Venture