The Transparency Paradox: Private vs Public

Lack of transparency means that information is not visible or available. Complexity means that the information or rationale is hard to understand.

This article discusses the transparency of structured products and private market investments. The next article will address complexity.

Transparency in Private Markets

Private market investing usually entails buying or lending to private companies. In most jurisdictions, private companies have no legal obligation to publish the amount of information that public companies do. Such lack of publicly available information makes them theoretically opaque.

However, those involved in private market deals have direct access to management and company data, which gives them far more information than public companies are legally obliged to disclose.

This higher level of transparency is available before the investment is made under a thorough due diligence process that normally precedes private transactions.

Investors in private markets may not be involved in the day-to-day workings of the firms in which they invest. In private equity deals, this role is assumed by a General Partner who acts as a sponsor on behalf of the investors (Limited Partners).

Being involved directly with management, the sponsor has far more insight into the most intricate operations of their private firms. Meanwhile, Wall Street analysts only have the information that public companies are required to disclose by law.

Transparency in Structured Products

Structured products almost always deal with publicly traded securities. Investors have access to all the publicly available information relating to the underlying assets.

But if the underlying assets are a group of, say, “tech stocks,” it may not be possible or practical for the product issuer to disclose the individual securities.

Moreover, the products themselves—into which investors place their funds—may lack transparency.

All structured products usually feature standard disclosures, such as caps on return, maximum downside protection, and standard risks (the complexity of which will be discussed in the next article).

But some aspects, including how returns are achieved, may be withheld deliberately if they entail a “proprietary methodology” or “trade secret.”

Conclusion

Structured products may offer greater transparency than private markets in some areas—such as valuation and exit strategy. But private markets may offer greater transparency overall, as the investor is closer to the company itself.

The below table illustrates the key points of comparison:

Some issues of transparency cannot be fixed—such as proprietary information—but an experienced advisor can identify and seek the additional data needed to make an informed investment decision.