This Sector Loves Market Downturns

Amanda Heckman|February 5, 2022

The markets are spooked.

After a tough January, the year’s shortest month started off on a better foot. But if you blinked, you may have missed it… because on Thursday, disappointing results from Meta Platforms (formerly known as Facebook) dragged the markets back down.

The calls for concern are getting louder. Folks are nervous. But there’s a bright spot smart investors should be looking at.

Market downturns are the perfect time to diversify outside of the stock market and invest in the private markets.

What Downturn?

In light of the recent market volatility, Neuberger Berman, an investment management firm, looked at private-equity performance during the last two big downturns… the early 2000s dot-com bubble and the 2007-2009 market crashes.

It found that the private-equity sector saw less significant drawdowns of cash invested… and had quicker recoveries than the public markets.

The reason is clear… A downturn simply carries far less weight in a sector where investments are held for the long term and money doesn’t trade hands every day.

And thanks in part to those long-term holdings, the private market has experienced far less volatility since 2008 than other sectors like infrastructure, real estate and natural resources.

Market downturns have spurred major shifts into the private markets as well.

“Once bitten, twice shy,” as the saying goes…

Savvy investors have steadily reduced their allocations to stocks and increased their investments in private equity since the downturn in 2008.

In fact, 2018 marked the first year that more capital was raised through the private markets than the public markets.

And since COVID-19 rocked the markets and shook investors, private-equity investing has flat-out taken off. In 2021, companies raised more than $300 billion in new capital for just the second time ever. And $1.2 trillion in private-equity transactions took place in the U.S. alone.

Equity crowdfunding – private-market investing for the average investor – has experienced explosive growth as well. The industry saw more than $211 million raised in 2020. By 2025, the crowdfunding market is predicted to grow by nearly $200 billion, with a compound annual growth rate of more than 15%.

Ripe for Opportunity

To be sure, COVID-19 has had a big impact on the private market. It has pushed investors to find places to stash their cash outside of the public market, which experienced a devastating drop at the pandemic’s inception and has been held together since by the Fed’s tape and Elmer’s glue.

But it’s also created a new generation of businesses ripe for opportunity, just like the 2007-2009 crash did.

During the first year of the Great Recession, for example, more than 550,000 new businesses were launched. And in 2020, we saw a similar spike, as folks couldn’t go to work or lost or simply left their jobs.

Many of these young, small companies will be looking for funding. If we see another downturn, traditional lending will likely get tight as banks shore up their cash reserves. So these startups will turn to private equity for cash.

That means there could be immense investing opportunities.

If that doesn’t excite you, consider this…

We’ve told you before that some of the biggest companies got their starts during recessions. As we said last month…

There is a rich history of companies started in economic downturns going on to become some of the richest, most innovative companies on the planet. Microsoft, Uber, Disney, Revlon, Warby Parker, GE – those were all started during economic downturns.

So investors shouldn’t fear a market drop. By putting some cash into the private markets, they can diversify and reduce the volatility of their portfolios and get the chance to invest in the next Microsoft… all for as little as $100.

We just released our research on the huge opportunities in the private markets. You can find out why we’re so excited… and learn about the company we think could be the next billion-dollar unicorn… right here.