Public vs. Private Equity Securities

The public securities market is still significantly larger than the private securities market, but investments in private equity have rapidly increased over the last few decades. Because of the size of public securities markets and to protect less sophisticated investors, the public markets tend to be much more regulated than the private markets. Due to the additional scrutiny, public firms are incentivized to ensure shareholders that management is acting in their best interests and some evidence has shown that corporate governance is more effective at public firms than at private firms. Generally, public securities have much more active secondary markets where investors can easily and cheaply sell their securities at market prices.

This is not the case for private securities, which often are highly illiquid and are traded through negotiations with other investors. However, investors in the private markets expect to be compensated with higher returns for the additional limitations. Most investors gain exposure to the private markets through venture capital (start-up financing to early-stage companies), leveraged buyouts (taking companies private), or private investments in public equity (private purchases of secondary offerings by public firms). By going private, management can adopt a more long-term focus and eliminate costs related to public disclosure instead of struggling to meet quarterly targets.

Question

Why might a pension fund decide to increase its allocation to private securities and reduce its allocation to public securities?

A. To increase the fund’s liquidity in order to pay out future short-term obligations

B. To reduce overall transaction costs and management fees

C. To increase the fund’s expected return

Solution

The correct answer is C.

A move to more investments in private securities would likely reduce the fund’s liquidity and increase transaction costs and management fees. However, most investors expect higher returns from their private security investments than public security investments.

Reading 39 LOS 39c:

Distinguish between public and private equity securities



Isha Shahid
Isha Shahid
2020-11-21
Literally the best youtube teacher out there. I prefer taking his lectures than my own course lecturer cause he explains with such clarity and simplicity.
Artur Stypułkowski
Artur Stypułkowski
2020-11-06
Excellent quality, free materials. Great work!
Ahmad S. Hilal
Ahmad S. Hilal
2020-11-03
One of the best FRM material provider. Very helpful chapters explanations on youtube by professor James Forjan.
Rodolfo Blasser
Rodolfo Blasser
2020-10-15
The content is masters degree-level, very well explained and for sure a valuable resource for every finance professional that aims to have a deep understanding of quantitative methods.
Mirah R
Mirah R
2020-10-15
Great course! Very helpful
Priyanka
Priyanka
2020-09-29
Analyst Prep has actually been my soul guide towards this journey of FRM.I really appreciate the videos ad they are ALIGNED , good speed, and the Professor just keeps everything Super CASUAL. If I Clear my exams Ultimately credit goes to you guys. Keep sharing. God bless.
Sar Dino
Sar Dino
2020-09-29
Had a test on actuarial science coming up and was dead on all the concepts (had to start from ground zero). came across the channel as it had small bits of FM chapters consolidated by the professor Stephen paris. this made it easy for me to look at the chapters i was having trouble with (basically everything lol). I love the way he explains the questions, and the visualization! its so helpful for me to see the diagrams and how the formulas move around. he really did a great job explaining, and i understand so much better. 7 weeks worth of lessons condensed into 3 days of binge watching their videos.... Amazing and i am truly baffled as to why the videos have not gained traction as they should have!

Share:


Related Posts

Quote-driven, Order-driven, and Brokered Markets

Quote-Driven Markets/Over-the-Counter (OTC) Markets In quote-driven markets, customers trade at prices quoted by...

Factors that Affect Sensitivity to Business Cycles

Sensitivity Factors A cyclical company is likely to experience wider-than-average fluctuations in demand,...