How Private Markets Can Take the Lead in Crisis
With market volatility on the rise, understanding the role of private markets in navigating crises is more crucial than ever. In this article, we explore how private markets can not only withstand turbulent times, but also help investors navigate through uncertainty.
In our article on February 10th this year (“Hanging in the Balance”), we outlined some of the warning signs that the market was due for a correction, and discussed ways in which investors could weather a period of volatility should it arise.
10 days later, the S&P 500 began a descent that saw it fall by more than 1000 points in just under two months. The CBOE Volatility Index (VIX) has since risen from a range of 15-20 to more than double that level, even touching 60 on April 7th.[1]
As we pointed out in the original article, this is a periodic phenomenon and part of the market cycle. While the driving forces - in this case, the wide-reaching tariff announcements of the Trump administration[2] - may take different forms, volatility always returns in one way or another.
Data: https://fred.stlouisfed.org/series/VIXCLS#
That said, there is good reason to believe that the current turmoil will not blow over quickly if, as some commentators believe, the U.S. is genuinely set on bringing about a step-change in global trade and international relations.[3] Until the new equilibrium is found, investors should consider how best to make their portfolios “volatility-proof” as far as possible.
Shelter From the Storm
We have previously examined how private market investments—spanning private equity, credit, infrastructure, and real estate—can serve as valuable diversification tools, and that diversification is one of the few reliable tools against uncertainty.
To recap briefly: private investments give investors two things that public markets cannot: insulation and control.
Investors are somewhat protected from the wilder gyrations of the stock market thanks to the fact that private investments are not valued by the second. This is helpful psychologically, not only for investors in PE, but also for a portfolio company’s internal management, who can take a more level-headed approach during times of market turmoil.
Privately owned firms with active investors are better placed to adjust their strategy in response to genuine changes in the wider environment. This contrasts with the passive nature of a small holding in a large, publicly-traded firm.
However, private markets are not simply more resilient during periods of higher volatility. Mounting evidence suggests that they may, in fact, perform better during times of crisis.
Thriving, Not Just Surviving
A report by Schroder Capital released in October 2024[4] showed that private equity not only outperformed public markets over the past 25 years overall (by approximately 4%), but that this outperformance margin increased during the five major crises that occurred during the period.
Source: Schroders Capital
Looking at performance during the crises themselves, private equity outperformed the MSCI ACWI Gross Index by an average annualised excess return of 8%, which is twice that of the overall average.
In other words, outperformance is the norm, and the stormier the environment, the higher the outperformance. PE is therefore attractive both from a return perspective and a portfolio risk management perspective.
A study from a few years earlier by Neuberger Berman[5] that analyzed PE performance during times of market stress found similar results. For example, in the Global Financial Crisis of 2007-2009, the U.S. Buyout sector experienced a total decline in asset value of 28%, roughly half that of the S&P 500, which fell by 55%.
The Neuberger Berman report also offers additional data that illustrates how structural features of private equity make such outcomes not only possible but likely.
For example, it shows that PE funds continue deploying capital during downturns, thanks to their structure and pre-committed capital. This can lead to a stronger recovery later on, as funds are buying just at the moment public investors are fleeing to safety, leaving oversold and attractively priced companies for the taking.
PE funds, with a longer-term horizon, are not forced to sell at fire-sale prices when market sentiment is down, as their investors have already committed to the same long-term timeline.
Conclusion
The case for private markets, as stated above, is a very strong one. Markets such as private equity can point to 25 years of outperformance, and even higher returns during crisis points. Public markets, on the other hand, look overvalued by historic standards, leading to a higher probability of loss.
On a more fundamental level, the smaller companies that private market investors deal with have naturally higher potential for upside, together with the greater agility of a smaller-scale organization, minus the pressure of short-term targets.
All of the above comes with an important caveat: not all private deals are created equal. The headline figures are an aggregate of a highly segmented market with many different approaches and teams.
While they enjoy some independence from the wider market, private deals are highly dependent on the individuals involved - the lead investors and the management team. The advantages of private markets are real, but they are not cheaply bought. Instead, they require proper judgment and experience.
We’ve been helping clients to achieve their diversification goals with private markets exposure for over two decades. This is why we can make our recommendations with confidence, especially during times - like now - when confidence is in short supply.
