Private Markets: An opportunity worth exploring

With so many investment challenges to consider these days, it can be beneficial for investors to focus on long-term structural growth opportunities and specifically their exposure to private markets.

Find out more about the importance of private markets and how investors can add them to their portfolios in the current environment.

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Private Equity represents the lion’s share of private markets, with USD 11.3 trillion in assets under management. Private equity strategies refer to equity investments made into companies that are not publicly traded, thus providing investors with equity-like ownership interest and returns. 

Private Debt strategies focus on non-traded debt instruments issued to public or private companies. Private debt managers typically source, negotiate, and originate debt instruments with borrowers, providing investors with a credit-type risk. 

Private Real Estate strategies focus on acquiring real estate and related assets, particularly in the value-add and opportunistic segments, where active management can drive substantial value creation. Private equity real estate offers potential for inflation protection, income and somewhat lower correlations to traditional assets. 

Private Infrastructure strategies focus on acquiring infrastructure assets which often exhibit the following common characteristics: high barriers to entry, low price elasticity of demand, stable and inflation linked cash flows. Similar to real restate, some private infrastructure strategies, offer potential for inflation protection and lower correlations to traditional assets.

Private markets are still very much overshadowed by listed assets in scale. Assets under management for private equity are equivalent to roughly 5% of the value of publicly traded stocks. But private markets are gaining in popularity. While private market investments require investors to lock up funds for longer, they have historically been rewarded with higher returns.

US public pension allocation to private markets, historical returns of various asset classes, private markets an important asset class, private equity investments as a way to access a wider spectrum of equity opportunities, private capital growth forecast

Historical returns for various asset classes

Private markets have grown in popularity among institutional investors: average allocations for US public pension plans rose from 18% in 2012 to 20% in 2020, according to Public Plans Database. A key reason for this increase is the view that the asset class can improve both absolute and risk-adjusted returns for investors relative to traditional liquid portfolios and offer differentiated investment opportunities.

Historically, private markets have outperformed public markets by a significant margin. For many investors, this additional return premium can enable greater wealth accumulation and wealth transfer opportunities or support ongoing expenses. Illiquidity, value creation, and financial engineering are some of the drivers to this outperformance which we expect to persist in the coming years.

Private markets are also becoming an increasingly important asset class because of their access to opportunities not available through listed markets. For investors, this means gaining exposure to fast-growing and innovative businesses is becoming harder when only investing in listed equities. Importantly, upon listing, these companies are often larger and at a more advanced stage of their lifecycle. As a result, they may not offer the same growth profile and return opportunity. Therefore many investors are complementing public equity exposure with private equity investments as a way to access a wider spectrum of equity opportunities, add differentiated sources of returns to portfolios and potentially avoid missing out on returns. According to Preqin, private capital could grow by 14.8% per annum between 2021 and 2026 to reach USD 17.8tr from USD 8.9tr at the end of 2021.

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