Private assets have been talked up plenty in recent times. According to Legal & General Investment Management, “the plates under the global economy are shifting” as demographics, digitisation, decarbonisation and deglobalisation drive private assets. And S&P Global notes that private markets are experiencing “significant growth and transformation”, fuelling investments in infrastructure and energy transition, among other things, and that the “evolving dynamics require investors and companies to rethink their strategies for sustained success”. You could be forgiven for thinking that there was nowhere else to invest.
Well, up to a point. Although private assets are set to grow, they are expected to amount to a little over 10% of global assets under management rather than replacing public assets entirely. For all their much-hyped advantages, private markets do not seem to present a compelling model that can supplant public ones.
Regulators and bourses looking to address the growing number of firms choosing to stay private needn’t fear that they are about to lose their value case. After all, one main reason for companies staying private is a relatively slack IPO market due to external factors – private markets sponsors would use it to exit their holdings and float their investees if they could.
Private market firms managed to work through the end of the cheap money era partly by reconfiguring themselves, with private debt stepping up to take the place of private equity as the new hot asset sub-class, while providing the leverage capital that banks and other lenders were no longer willing or able to. The fund structures and compensation models remained pretty much the same.
For institutions or wealthy individuals considering holding private assets, concerns about the opacity and illiquidity look unlikely to ever go away. If a limited partner is desperate for some liquidity, the secondaries market, however buoyant, will always end up returning less money than originally promised or expected.
Private assets are also not counter-cyclical. Nor are they immune to broader macroeconomic pressures or shifts that will also impact public markets. Look how an inflationary environment and the end of cheap money has impacted their ability to deliver the promised returns. Investors should consider all of these points when weighing up their allocations to private assets.
