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The Private Market Opportunity

Shane Murphy

Shane Murphy

Head of Manager Selection and Derivatives

 

Allocations to private assets have grown significantly in recent years as institutional investors look to enhance diversification and returns, with these assets also offering the potential for inflation protection through unique investment opportunities. Investors need to be mindful of the risks and challenges, but we believe private assets are a valuable addition to multi-asset portfolios.

Private Evolution

Public markets have dominated the investment universe for decades, both as an avenue for companies to raise capital and for investors to generate better returns than cash, but this is changing. Over the past 10-15 years there has been a noteworthy evolution in the investment landscape with private markets moving from a niche activity to now representing a significant part of the investment universe. Private markets cover a wide range of assets including private equity, infrastructure assets, private credit and real estate and can offer better-risk adjusted returns than listed equivalents, providing valuable diversification for multi-asset portfolios.

Increased demand for private assets was partially driven by institutional investors seeking higher returns during a period of low interest rates. The range of interested investors is set to broaden amid increased appetite for these assets due to the attractive risk-reward profiles. Regulatory changes, like the UK’s proposed ‘Mansion House’ reforms, could enable greater flows and access for smaller investors, with platforms like Carta, Forge Global, and Republic giving accredited investors the opportunity to invest in private markets.


Considering the Options

Private markets have changed the way companies access capital. In the equity markets the number of listed companies has been on a downward trend over the past 25 years. In the US and UK the numbers have nearly halved over the period due to factors including increased regulatory burden and shareholder focus on short-term metrics like quarterly earnings, leaving less capacity to focus on strategic goals. New companies are more likely to remain unlisted, meaning private equity funds could give exposure to nascent firms and technologies. This is shown by leading-edge companies like OpenAI, SpaceX, Stripe and ByteDance (TikTok’s parent company) raising substantial capital and remaining private.

However, private equity and venture capital portfolios are usually more concentrated, resulting in greater idiosyncratic risk than public markets. Privately owned companies are also typically more levered than similar publicly quoted companies, making them more exposed to higher rates or a growth shock. Investors need to balance the potential for higher returns with the flexibility required for their capital requirements.

Private credit has also witnessed rapid growth, filling the void left by banks withdrawing from some types of lending. Attractive yields can be earned on senior loans with relatively low loan-to-value ratios, making private credit a viable alternative to listed credit given historically low spreads in the latter. Private credit yields are estimated[1] to be 200bps above equivalent public markets in both investment grade and high yield. Investors should also consider that each set or ‘vintage’ of private assets comes with its own unique characteristics, such as differing levels of covenant protections and sector concentrations.  Diversification across vintages is an important consideration within certain parts of the private credit space.

Elsewhere, property in Ireland and continental Europe offer the potential for strong returns. Real estate fundamentals are robust and it is attractively priced following the significant negative valuation adjustment that have occurred in recent years. The cyclical tailwind of falling interest rates is also set to bolster strong returns in the medium term.

Private markets will play a big role in financing the future, including the delivery of new infrastructure required to support AI and decarbonise the global economy. We believe substantial private capital will be required to achieve this in the coming years. These investments are likely to give investors access to stable, state-supported cashflows that are often linked to inflation. Each asset managers’ underlying exposure often differs significantly from each other, however, meaning there is higher performance dispersion compared to public markets and a greater need for asset allocators to be judicious in their selection of private assets funds.

ILIM Bottom Line

Private assets used to be a niche investment area, but it is becoming increasingly mainstream, supported by rising investor demand and improved accessibility. The risks and idiosyncrasies of the asset classes mean it is important to be prudent when selecting the most appropriate investments for clients. Overall, there are many benefits to private markets including the potential for higher risk-adjusted returns than public markets and, as strong advocates for deep diversification, we view private assets as a valuable addition to multi-asset portfolios.