Private markets continue to attract innovative companies and executive talent, and access is becoming easier for a wider range of investors.
The pace at which private markets have grown cannot be ignored. While the world’s total private assets of $11.7 trillion are still dwarfed by the $124 trillion capitalisation of public markets, a broader community of investors is allocating capital to private markets. This has underpinned growth in assets under management by nearly 20% per annum since 2017.
Capital markets and regulation set the tone
As a public equity analyst in the mid-1990s I spent much of my time interacting with specialist investment banks that played a leading role in an extraordinary initial public offering (IPO) boom at the dawn of the dot.com era. Somewhere in a dusty Rolodex I still have expensively embossed business cards from Hambrecht & Quist (‘H&Q)’, Alex Brown & Sons, Montgomery and others. These were the teams that took some of today’s tech titans public – including a then little-known online bookseller called Amazon.
Many investment banks have long since been absorbed by larger banks, shrinking the grassroots deal-sourcing network that used to expend its collective charm urging private company CEOs to list. Prevailing conditions in capital markets have also favoured a shift towards private markets. Exceptionally low interest rates between 2008 and 2022 made the debt used to fund private equity (PE) deals cheap and widely available, while the growth of private credit funds and prevalence of covenant-light loans made issuing debt less onerous.
Added to this, the regulatory backdrop became more favourable. Policymakers acknowledged the need to give innovative businesses and companies undergoing change more effective insulation against the short-term pressures of public markets.
Another development favouring private markets is the rapid growth of secondary private markets, particularly during the past decade. Although these will never provide the ease and convenience of public exchanges, they have greatly improved liquidity and increased the liquidity options available to market participants.
In particular, we have seen huge growth in institutional funds specialising in secondary fund investments and secondary single-company deals. This has been a welcome development for general partners (GPs) and limited partners (LPs) seeking to take money off the table, realise profits, rebalance portfolios, meet capital call payments or simply secure liquidity for new primary investments. For the companies themselves, more liquid secondary markets can reduce pressure from their employees to use IPOs to release value.
The attractions for companies of going private
For companies considering going private, a key attraction is freedom from the constraints and costs of public governance, dividends and equity buybacks. This freedom can allow company management to focus on operational and strategic implementation.
The private equity playbook relies on highly capable company management who perform hands-on roles in underlying portfolio companies and can act quickly to implement change, augmented by specialist SWAT-like support from the PE firm. This, in turn, is creating a generation of ‘C-level’ executive talent that prefers to stay within the private realm, which can offer them highly aligned incentivisation and less reliance on public stock prices for a significant element of their compensation.
And what attracts investors?
For many investors the attraction also lies in the ability to diversify their portfolios into additional themes available within private markets
It is tempting to assume that investors’ primary concern is solely to maximise returns. However, our experience suggests that for many investors the attraction also lies in the ability to diversify their portfolios into additional themes available within private markets, with the aim of increasing their potential return per unit of risk.
This added diversification can help in offsetting the trend which has seen the number of companies listed on US exchanges shrink by 27% over the two decades to 2020.
As a result, public markets are increasingly dominated by a relatively small number of companies – particularly US tech giants. Companies are also staying private for longer. In 1980 the median age of a company at its IPO was six years; in 2022 this had risen to 11 years. While there are many high-quality listed companies available, this trend has made it more challenging for public-market-focused investors to tap into the diversification and return potential of high-growth companies.
For many investors who have been able to access private markets, the additional costs and illiquidity have been worth it. PE performance has stood up well across market cycles: over the past 25 years, global PE returns are estimated to have been around 14% per annum, double the 7% annualised return delivered by the MSCI World Index.
Looking ahead, the next investment cycle is likely to be tech-driven as the world looks to artificial intelligence (AI), IoT (internet of things), big data, automation, smart finance and clean energy technology to help us address the challenges of climate change, ageing populations, labour shortages and deglobalisation. Many companies that are currently developing cutting-edge technology are small, high-risk, high-growth and – yes – private.
This is nothing new: in the last investment cycle, new technology in diverse areas – including chip design, cloud computing and software as a service – was first developed by private companies before being acquired by larger tech companies such as Apple, Google and Microsoft. Investing through both public and private markets can offer access to the widest opportunity set as these exciting themes continues to develop.
A new breed of private equity investor
Historically, PE has tended to be beyond the reach of many types of investor. While individual investors own approximately 50% of global assets under management, they own just 16% of alternative investment funds.
This is beginning to change, partly because PE firms are better at explaining private markets and the reasons to diversify part of your portfolio into the asset class. Demand has grown among a wider range of investors, and the industry can increasingly meet that demand via innovations such as semi-liquid strategies that are accessible for high-net-worth individuals, family offices and private wealth managers.
In the process, the traditionally high costs of PE investment are coming under pressure. Like other LPs, we aim to play our part in reducing fees, for example through securing fee-free co-investments, or negotiating early investment discounts.
Capturing the opportunity
For us, the opportunity is to enable more investors to access private markets  by providing appropriate investment vehicles and risk/return levels while meeting investors’ expectations for liquidity and transparency.
Furthermore, while current market conditions may present some challenges in marrying up the new demand for private assets with supply, we are seeing secondary investments being offered at highly attractive discounts to net asset value.
Over the longer term, the growing appetite for PE is unlikely to meet with supply constraints, allowing more investors to access the opportunities the asset class presents. As Bain and Company note in their 2023 Global Private Equity Report: “The long-term opportunity private equity presents may be bigger than the traditional sources of capital can support...”.
The growth and structural improvement that the PE industry has seen over the past two decades is a positive development for capital markets. A wider range of investors can now access previously inaccessible themes and companies if they partner with experienced, global managers who can identify opportunities in dislocated markets, thanks to in-depth, fundamental research. This could provide investors with more options for diversification and additional avenues of growth.
 As at June 30, 2022. McKinsey, Global Private Markets Review 2023, Private markets turn down the volume, March 2023
 Bain and Company, Global Private Equity Report 2023
 Cov-lite (covenant-light) loans are loan agreements that have fewer covenants designed to protect lenders, who usually receives a higher interest rate by way of compensation for assuming greater risk.
 GPs, or general partners, are private equity firms that invest on behalf of limited partners (LPs), who provide capital. LPs are usually pension funds, institutions (including sovereign wealth funds), family offices and wealthy individuals.
 Bain & Company, Global Private Equity Report 2023
 Bain and Company, Global Private Equity Report 2023
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