A big deal was made in the press this past week about how pension fund OMERS decision to shift their portfolios toward private equity, real estate, and infrastructure investments and away from public market investments allowed them to earn a positive return in 2018.
While superficially this might be the case, the reality is that this is primarily a result of the way different asset classes are measured for the purpose of recording returns.
Public market securities are marked to market at the end of a reporting period. In other words, whatever the price of the security is at the close of the reporting period (year end for example) is the price at which the investment is recorded. Private market investments on the other hand (including real estate and infrastructure) are valued at “fair value”. Fair value is focused on business value and calculated in a variety of different ways using business like metrics (discounted cash flows, income basis, recent financing levels, precedent transactions, etc.).
The public market investor benefits from liquidity but is subject to price volatility. The private market investor has limited liquidity but is not subject to market “moods”. However, in the end, a transaction for a control position in either public or private market investments should be essentially the same.