The Buried $150 Billion Bet Inside the Top 20 U.S. Stocks

Key takeaways

Many of the largest public companies already have significant indirect exposure to private companies through their stakes and investments, providing some private market exposure without additional costs.
Private company valuations, especially in tech, can heavily influence public company earnings due to mark-to-market accounting, potentially exaggerating growth figures.
While private assets can offer diversification and potentially higher returns, they are difficult and costly to access broadly, and their returns are highly dispersed and unpredictable.
Investors should be cautious of chasing private market investments for quick gains, as the true performance and risks are often less transparent than in public markets.
Public markets provide real-time, transparent valuation of companies, which is generally more reliable for assessing true economic performance than private valuations.

Summary

The Hidden Private Market Exposure in Large Public Companies

This section discusses how the largest US public companies, such as Alphabet, Amazon, and Nvidia, have substantial investments in private companies like Anthropic, Stripe, and Flipkart. These investments are often through direct stakes, corporate venture capital arms, or subsidiaries. The conversation highlights that these private holdings are already embedded in the portfolios of retail investors through their investments in these large public firms, providing indirect exposure to private markets without the high fees typically associated with private investments. It also emphasizes that for individual investors, gaining broad and cost-effective exposure to private assets is challenging, and most of the exposure they get is already via public equities.

Impact of Private Company Valuations on Public Market Earnings

This section explores how private company valuations, especially in high-profile tech firms like Nvidia and Amazon, influence the reported earnings of the public companies that own stakes in them. Spencer Jakab explains that many of these private valuations are marked to market, which can significantly inflate earnings reports even if no actual cash changes hands. This creates a scenario where reported earnings are partly based on paper gains from private valuations, leading to potentially misleading growth indicators. The discussion stresses that these valuations are not necessarily reflective of real cash flow or sustainable earnings, raising concerns about the accuracy of these reported profits.

Performance, Diversification, and Challenges of Private Markets

Here, Caitlin Hendrix presents research on the historical returns of private assets such as private equity and private credit. While some private assets have outperformed public markets over the long term, the results are inconsistent and heavily dependent on managers and timing. The wide dispersion of returns and lack of persistence in manager performance suggest that investors need to be cautious when seeking diversification through private assets. The conversation underscores that private markets are difficult to access broadly, often expensive, and may not always provide the premium returns investors hope for. Overall, it questions whether chasing private market exposure is worth the cost and complexity.

Show notes

This week, we’re bringing you an episode of WSJ’s Take On the Week. Host Telis Demos and guest host Spencer Jakab, investing columnist and writer of the Markets A.M. newsletter, are joined by Kaitlin Hendrix, asset allocation research director at Dimensional Fund Advisors, to decode investors’ surging interest in private markets.

They break down how investors may already have exposure in their investment portfolios to private companies like Anthropic, Stripe and Flipkart, through holdings in companies like Alphabet's Google, Amazon and Nvidia. Hendrix explains why your public index fund might already provide the diversification you’re looking for, without the high fees. Plus, Jakab explains the way that big tech’s private company investments are boosting earnings to near-unprecedented levels.

To watch the video version of this episode, visit our WSJ Podcasts YouTube channel or the video page of WSJ.com

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