Private markets are bigger than you think

The growth of the private markets is often tallied in terms of dollars flowing into funds and deals. But those metrics don’t capture their true size.

It turns out that private markets—and venture-backed companies in particular—are worth more than typical yardsticks indicate, and they are growing more quickly than public markets. This has implications for how they will be scrutinized and regulated in the future.

To deliver these findings, PitchBook analysts estimated the total market capitalization of companies backed by private equity and venture capital, allowing for an apples-to-apples comparison to public companies. The research was published in PitchBook’s latest Quantitative Perspectives Report.
 

 

Read about our methodology below.

VC-backed companies have a combined market cap of between $2.9 trillion and $3.7 trillion—about the same as that of companies backed by PE buyout and growth firms. That assessment might seem counterintuitive, given that PE firms raise bigger funds and do larger deals than VC firms. And judging by the net asset value of funds across strategies, PE appears to be much larger than VC.

But VC investors take much smaller stakes in companies. After adjusting for this smaller equity ownership, the market cap of VC-backed companies is quite substantial.

Two additional factors account for VC’s high market cap: lots of companies and high valuation multiples. About 36,000 companies in the US are VC-backed, versus nearly 16,000 PE buyout- and growth-backed organizations and 4,805 publicly listed companies, PitchBook data shows. Soaring valuations, based on higher growth expectations, also pump up the collective value of VC-backed companies. Unicorns alone are worth a combined $2.3 trillion.

In recent years PE- and VC-backed market cap has been growing faster than that of their public peers. Analysts found that the midpoint of the estimated market cap for these private strategies was 8.1% of the value of public markets in 2017. By 2021, that figure was 12.4%.

This growth has fueled a debate over whether to allow more retail investors to access private funds.

“The bigger that private markets get, the more scrutinized they become,” said Zane Carmean, a lead quantitative analyst at PitchBook who spearheaded the research. “If private markets take more and more share compared to public markets, it strengthens the argument that mom and pop investors are lacking access.”

The latest development in the effort to broaden access to private markets was Ark Invest’s launch of a VC fund for retail investors on the Titan platform. Some of the largest PE investors have also made it clear that they see retail investors as a cornerstone of future growth. 

The SEC seems to be on board with this push, provided investor protections are in place. As it pursues increased transparency from private fund managers, the agency has also recommended increasing access to private markets.
 

Read the full Q3 2022 Quantitative Perspectives Report

Methodology

To estimate the market cap of private fund strategies, PitchBook analysts first calculated the net asset values of all funds in three categories: VC, PE buyout and PE growth.

The analysts then applied an assumption of equity ownership to come up with a range of market cap estimates. That ownership is the smallest for VC (20% to 25%) and largest for PE buyout (65% to 80%). A lower equity ownership assumption results in a higher relative implied market cap. This multiplier effect is especially large for VC funds. Investors own smaller stakes in startups, so the value of their funds is smaller relative to the valuation of the companies than it is for PE strategies.

The result is a crude estimate that doesn’t account for the fact that private funds often hold onto portfolio companies after they go public. Therefore, a portion of the market cap estimates represents the value of formerly VC- or PE-backed companies that have since gone public.

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