The outlook remains positive
Last year, fundraising in private markets fell 11% to $1.2 trillion. Real estate and private equity were particularly affected, declining 23% and 15%, respectively.[2]
The headwinds of 2022 affected most markets negatively, including public markets. The S&P 500, for example, fell 19.2% in its worst year since the 2008 financial crisis.[3]
But 2022 was still among the highest years for private markets fundraising,[4] and the trajectory in private markets over the last 15 years remains clearly upward.
Source: Mckinsey & Company
Traditionally, insurers have tended to be among the most conservative investors, allocating just 1-6% of their investment portfolio to private markets. A recent BlackRock survey showed that 89% of insurers plan to increase exposure to private markets in the coming two years.[5]
A Goldman Sachs survey of 200 asset managers operating in private markets showed that 64% of respondents saw investment conditions improving, and 22% said they were stabilizing.[6]
Meanwhile, family offices now allocate 35% or more to private markets, compared to just 15-20% 15 years ago.[7]
The need for discernment
Private markets offer lucrative opportunities. Private debt markets in Asia, for example, offer yields above 10% for a three-year transaction, compared to 8.3% for the ICE BofA Global High Yield Index, which tracks high-yield, publicly traded debt globally.[8]
But investors should not invest in private markets blindly. They should seek the best opportunities. For example:
Direct lending: An uncertain economic environment makes access to finance more difficult. Direct lenders can negotiate higher yields and stronger downside protection.
Infrastructure projects: The transition to a low-carbon economy combined with digital enablement and de-globalizing supply chains, has led to an estimated investment gap of $3.6 trillion.[9] Private markets are needed to fill this gap.
Private real estate: Real estate assets generate stable income and are often backed by growing demand. The retreat of traditional lenders creates a genuine opportunity for private lenders to obtain attractive equity-like returns while taking the safer debt risk.
Private equity: Although access to cheap debt is no longer available, private equity managers with operational knowledge can still add value, especially in a more punishing market.
Targeted investing in the above areas can deliver attractive results, even if the sector as a whole is performing less well.
Conclusion
Private market investors who deploy capital when the environment is challenging can achieve attractive terms upon entry and reap the full upside when the market recovers.
Also, the performance of private equity managers tends to vary widely, with the top quartile achieving about 21% higher returns than the bottom quartile, compared to just 13% for hedge fund managers[10] and 2.6% for public stocks managers.[11]
A successful private market strategy requires specialized expertise in the underlying assets. Successful investors work with a partner who can access the best deals and build a diversified portfolio of private market assets based on their investing goals and risk tolerance.
[1] CNN.com
[2] Mckinsey & Company
[3] The Washington Post
[4] Mckinsey & Company
[5] BlackRock
[6] Goldman Sachs Asset Management
[7] Investec
[8] The Straits Times
[9] JP Morgan
[10] JP Morgan
[11] Institutional Investor