In this article, we’ll be examining what Private Markets are in more detail, why incorporating them into your strategy may be worth considering, and some important factors to take into account.

A Brief History of Private Markets

As the name suggests, Private Markets comprise the universe of investments that are not traded publicly on exchanges like regular stocks and bonds. Another way of saying this is that they are ‘illiquid’ - you cannot buy and sell them at will, and your investment is typically tied up for several years.

The term ‘Private Markets’ is broad, covering a large variety of investment types (equity, debt, real estate etc.), as well as a number of different investing styles (growth, value add, buyout etc.).[1]

As the investments are not public, it is easier to find high growth opportunities that others have overlooked. Furthermore, investors are typically able to influence direction-setting and firm strategy. All of which has tended to lead to higher returns in comparison to investments in public markets (see the chart below).

Source: CAPE Global Private Equity Index, Cliffwater Direct Lending Index, Cambridge Real Estate Index, Global Real Estate Fund Index, MSCI AC World, Barclays Global Aggregate.

This is in spite of a very strong performance in the public markets, particularly in the last decade.

Private Markets in 2022

In the decade following the financial crisis, Private Market investment fundraising has grown consistently year-on-year. After a slight dip during 2020, this growth continued with a total of $1.2bn funds raised - a new record.[2]

Intelligence firm Preqin believes that this trend will persist, and total private market capital will grow annually by nearly 15% over the next five years, reaching $17.8 trillion by 2026.[3]

While global instability, fears of recession and stagflation are typically bad news for investments overall, there is reason to believe that Private Markets could be a bulwark against this uncertainty.

Why is this? By definition, an investment in the private market is long-term oriented, removing the risk of panic selling, which may be highly damaging to a portfolio. Furthermore, a depressed market inevitably leads to more attractive valuations across the board, including companies with solid growth prospects.

Investors in Private Markets are more likely not only to find promising opportunities, but are also in a position to contribute to their success, through direct participation in strategy-setting and firm management.

For this reason, funds launched during crises have very often outperformed their peers.

Why you should consider Private Markets

Investment strategies that have served investors well during the past two decades may not be viable in a ‘new normal’ environment.

Experts believe that strong, consistent growth in public markets is unlikely to continue at the same pace. UBS, for example, has predicted that returns on a standard portfolio could fall by nearly 2%.[4]

Source: Bloomberg, UBS Capital Market assumptions 2022

To preserve and grow your capital in line with your long-term needs, it may be necessary to seek higher returns.

As already indicated, Private Markets offer a number of opportunities to enhance returns:

-        More options: Expanding your sphere of potential investments to include private companies naturally increases your chances of uncovering alpha-generating deals.

-        Better options: As competition for returns in public markets intensifies, earlier-stage companies (who are typically not publicly listed) may offer more headroom for growth.

-        Less ‘noise’: A longer-term investment period not only gives time to see the fruits of a well-executed strategy, but is also psychologically beneficial in filtering out the ‘noise’ of current events and market volatility.

As usual, there is no such thing as return without risk, and due care is needed to successfully incorporate Private Markets into your strategy.

In addition to diversification (e.g. geographies, strategies, and vintage years), it should be ensured to have enough liquid capital to meet the corresponding needs while the funds are invested.

And naturally, selecting the right manager is of paramount importance.

How we can help

Petiole Asset Management has a track record of providing investors with tailored financial solutions. This includes providing our clients access to opportunities in the Private Markets, whether through funds or through hand-picked deals.

As a Petiole client, you benefit not only from the ability to co-invest with our institutional partners, but also from our rigorous analysis of market trends in the rapidly changing post-pandemic world we now live in.

Click the link below to find out more or book an appointment with one of our specialists.

[1] UBS

[2] Mckinsey

[3] CAIA

[4] UBS