The reflexive dynamic between public and private markets in this coming period of the unknown will make for interesting economic analysis. Private markets have always looked to the public for hints of receptivity and valuation metrics up ahead, as these things may shape liquidity of the illiquid long-hold investment. Public markets, in turn, look to the private for hints at coming innovation and disruptive forces that shape consumption and behavioral trends. In essence, each of the two influences and rounds out the other’s perspective.
In the case of institutional (partnership) funds, which make up the majority of money flows on both sides, there is yet a third body in the mix, the limited partner (LP), who often stands behind both simultaneously, as a matter of portfolio diversification. It isn’t unusual for performance on one side to affect LP allocation to the other, but we all know that when three bodies are involved the combined trajectory is unpredictable. It’s science.
And the uncertainty has only just begun… Because the three described bodies collectively make up a unit – call it, markets – that is itself one of three in the more universal context. Together with the other two – the economy and, for lack of a better term, let’s say society, which is the base of general behavior and mood – the combined effect of the interconnectedness is unpredictable to an elevated degree. Even as each of the spheres impacts the others.
It’s a complicated network mesh, as previously contemplated here, where the uncertainty is escalated further still as all the different bodies referenced above look to each other for answers that no one really has. Financially, if value is made up of an asset and its optionality, this moment suggests a time when the asset value sinks while optionality rises. The former is determined by financial performance, the latter by volatility and future possibilities.
As we all watch and wait and look for some direction, the investment leadership, when it arrives, will likely come from the body best equipped to operate in a high uncertainty environment and best trained to evaluate long-term illiquid option value: venture capital.
The circular and reflexive influences are all the same, but the filter will have some qualifications that recommend it. Generally speaking and individual cases aside.