Memo 03: Public Market efficiency - and why it’s a problem
When I first completed my studies in finance, one lesson stood out with clarity and finality: public markets are efficient. It was a profound realisation—and a deeply disillusioning one. The foundational idea of the Efficient Market Hypothesis (EMH) is that all relevant information is instantaneously factored into market prices, given the efficiency of markets and the sheer volumes of money and trades. This has been empirically shown to be true over and over again.
Knowing that all known information is rapidly and accurately reflected in security prices, doesn’t just limit upside potential for investors; it removes the very premise of discovery, insight, and value creation. It implies that true outperformance, particularly for retail or non-specialist investors, is little more than luck dressed as skill.
For me, this marked a pivot point. I quickly lost interest in the noise of public equities—where headlines drive volatility, quarterly earnings guidance dictates strategy, and fund managers anchor their decisions on not underperforming a benchmark. Instead, I’ve spent a career in private credit and alternative assets, where real value can be uncovered, negotiated, structured, and grown.
Initial Premise: Market Efficiency Limits Outperformance
Public markets were originally born out of necessity. The earliest joint-stock companies—like the Dutch East India Company—emerged to fund long-term, capital-intensive projects with uncertain returns. Public ownership was a revolutionary solution: it pooled savings, shared risk, and enabled the development of global trade and infrastructure.
Today, however, those same markets are often reactive, short-term, and self-referential. Asset prices move not on fundamental changes, but in response to central bank statements, quarterly earnings whispers, and the fear of underperforming the S&P 500. Just witness the stock market volatilities today driven by claims and rumours around US tariffs!
Numerous academic studies support this. Research from S&P Dow Jones [1] shows that more than 85% of active fund managers underperform their benchmark over a 10-year period. Even worse, those who do outperform one year are no more likely to outperform the next—showing no persistence in manager skill.
In one striking study from the University of California, monkeys throwing darts at a stock page were found to outperform professional investors over time. This echoes the oft-cited economist Burton Malkiel, from his 1973 book A Random Walk Down Wall Street [2], economist where he wrote that “a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
The Rise of Private Markets
In contrast, private markets have emerged as a dynamic and unbounded arena for genuine value creation. According to McKinsey’s Global Private Markets Review, global private market assets under management surpassed $13 trillion in 2023, with private credit growing at 15–20% annually [3].
Private transactions are less efficient by design. This creates room for negotiation, structuring, and bespoke underwriting. Investors are closer to the asset. They have influence—not just exposure. They can improve performance, guide strategy, and manage risk at the source.
For example, in agricultural private credit—where I now operate—lenders must understand weather patterns, commodity cycles, asset security, management, and farm-level economics. There is no Bloomberg terminal for rural debt markets. But therein lies the edge: with proper underwriting and structuring, you can deliver superior, risk-adjusted returns while funding real economic activity.
The Liquidity Illusion—and What Private Markets Do Better
Liquidity is often cited as the key advantage of public markets. But this “always-on” liquidity comes at a cost. Prices are volatile not necessarily because businesses change, but because fund flows change. Liquidity promotes short-termism. Fund managers are forced to manage to quarterly numbers because redemptions can occur at any time.
Private markets, on the other hand, demand patient capital. Investors agree to multi-year lockups. This isn’t a disadvantage—it’s a discipline. Capital is committed, enabling long-term decision-making, portfolio stability, and operational improvements. Liquidity is structured—via managed redemption windows, waterfall distributions, and secondaries—rather than instant.
In private credit, liquidity management is even more tailored. Loan maturities are staged. Repayments are forecast. Cashflows are recycled into new loans or investor distributions. Structural liquidity replaces trading liquidity—and serves investors far better.
Have Public Markets Outlived Their Purpose?
If the original purpose of public markets was to pool and deploy long-term patient capital, private markets are arguably fulfilling that role more effectively today. Many of the world’s most innovative and well-run companies—like SpaceX or Cargill—choose to stay private, bypassing the volatility and distraction of public listing.
Public markets are no longer the engine of capital formation. They are an engine of capital redistribution. Liquidity is their function, not value creation.
Conclusion: Where Value Lives Now
The efficiency of public markets was once their greatest strength. But today, it’s also their limitation. In a world awash with data, liquidity, and passive capital, the ability to find or create alpha in public equities has all but disappeared.
That’s why my focus—and that of many long-horizon investors—has shifted. In alternative assets and private credit, markets are not efficient. And that’s the opportunity. Value can still be found, shaped, and delivered—not by guessing the next market move, but by building real relationships, funding real businesses, and underwriting real risk.
[1] S&P Dow Jones Indices’ SPIVA® U.S. Year-End 2024
[2] Malkiel, B. G. (1973). A Random Walk Down Wall Street. W.W. Norton & Company.
[3] McKinsey & Company. (2024). McKinsey Global Private Markets Review 2024: Private Markets Turn to Value Creation.