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What is private markets investing?
Private markets investing refers to the investment in the capital of privately-owned companies versus publicly traded companies.
There are six main asset classes within private markets:
Includes private lending and special situations
Includes buyouts, secondaries, and growth equity
Includes early- and late-stage financing
Includes brownfield investments and greenfield investments
Private real estate
Includes core, value-added and opportunistic
Includes agriculture and timber, and mining and metals
Private Markets Survey
How are managers tackling value creation in a challenging and uncertain market environment?
We surveyed 32 firms, representing $1.6 trillion in total assets, from across the universe of private markets strategies on key investment themes and where they are finding the greatest opportunities and risks.
3 reasons to invest in private markets
1. Inflation hedging
Private market investing can offer potential inflation hedging benefits, particularly for select infrastructure, real estate and natural resources strategies.
2. Reduced volatility
Valuations for private assets typically happen less frequently than for public assets, usually quarterly, so they don't tend to experience the same market volatility as public markets.
3. Return potential
Private capital markets have historically outperformed public assets over the long term, tapping into non-economic risk premia (e.g., illiquidity premium).1
Why private markets?
Private market investments provide a range of exposures depending on the risk/return, cash flow and correlation characteristics investors are seeking. Therefore, it is important to consider the role of private markets within your total portfolio:
The role of private markets in portfolios
New return sources
The investable opportunity set in private markets is substantially larger than in public market. There are approximately 95,000 private companies with over $100 million in annual revenues. In contrast, there are only 10,000 public companies of the same size. This makes the investable universe of private companies 850% larger than that of public companies.
Private credit can help generate income from private loans, secured by a company's cash flow or assets. In addition, loans are typically floating rate, which can benefit investors in periods of rising interest rates. Private real estate also expands income opportunities through rental income.
Reduced risks from diversification
Diversification in private assets can help manage downside risk and reduce overall volatility.
Provide inflation protection
Most infrastructure assets have an explicit link to inflation through regulation, concession agreements or contracts. In real estate, cash flows from periodically resetting contractual rent payments adjust to rising price levels. Also in an inflationary environment, replacement costs increase, therefore boosting the value of existing buildings.
Investing in private markets has traditionally offered higher potential returns with lower volatility than that experienced by more traditional listed asset classes.
Source: Russell Investments Strategic Planning Forecasts, March 2022
How big is the private markets universe?
All figures in USD.
How are private markets being used to solve investor challenges?
Institutional investors have some large structural and socio-economic challenges that could impact their portfolio beyond simply meeting a return target. There is growing inflation impacts from 'slobalization' and pressure on supply situations5 hampered from global pandemics and geopolitical situations. Private assets offer opportunities to support active participation in these mega trends.
Decarbonization, clean energy and the power to impact are core community-led themes organizations must navigate. Private assets can be used to help provide strategies to address these challenges in uncertain times.
What should private market investors look for in a strategic partner?
There are five key capabilities investors should demand from a strategic partner:
A total portfolio approach
Expertise in access and sourcing
Robust process for portfolio contracting and administration
Operational due diligence
Selecting a partner with demonstrated experienced in each of these categories is critical to navigating the market.
How can institutional investors access private markets?
Institutional investors can seek to manage independently across investment managers or partner with a third-party investment solutions provider. This can include an experienced OCIO (outsourced chief investment officer) provider. This reduces the burden on internal investment teams and allows the organization to focus on its core business competencies.
Read the latest from our experts on private markets
1 According to Hamilton Lane, private credit has outperformed its public counterpart in 19 of the last 20 vintages by an average of 479 basis points.
2 McKinsey & Company, McKinsey Global Private Markets Review 2022.
3 Hamilton Lane, Cobalt November 2020.
4 $USD, Hamilton Lane, Cobalt 2022.
5 Morgan Stanley, Remodeling the Global Political Economy, May 2022.