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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 brownfield investments and greenfield investments
Private real estate
Includes core, value-added and opportunistic
Includes agriculture and timber, and mining and metals
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 markets. 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?
Years of experience in private markets
Manager products monitored2
How are private markets being used to solve investor challenges?
There is growing inflation impacts from 'slobalization' and pressure on supply situations3 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
How can investors access private market opportunities?
Institutional investors, including the world’s largest pension plans, endowments and foundations, have been incorporating alternative investments in their portfolios since the 1980s.4
The key drivers for investing in private assets are diversification and the potential for higher returns. Thus, the inclusion of private assets to a traditional portfolio of stocks and bonds has the potential to generate superior risk-adjusted returns. In a low yield environment and after an extended bull run in public equities, retail investors would be well advised to consider an allocation to private assets.
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