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Seeking positive impact opportunities in private markets

2 min read 14 Jul 22

Assets under management in alternatives are projected to surpass $23 trillion by 20261 – an increase of just under $10 trillion in five years, according to data provider Preqin. So, how sizeable is the opportunity to address lasting positive impact via private markets given the long-term time duration of strategies and also the nature of close engagement with investee companies?

As the alternatives industry continues to grow, it is likely to play a key role in helping tackle the climate crisis and achieving net zero goals. According to PwC forecasts, European private market ESG assets will skyrocket to between €775.7 billion and €1.2 trillion by 20252 – accounting for between 27.2% and 42.4% of the entire industry’s asset base.

“While it may be difficult to see potential longer-term opportunities amid the volatility, many areas within private markets could be set to reshape economies.”
 

With inflation reaching 40-year highs in major economies worldwide, it continues to be the dominant theme of 2022. But looking beyond the noise, with assets in alternatives expected to reach gargantuan levels within the next five years, there are potential opportunities for private markets investors seeking to make positive change in the world over the long-term.

“A lot of the new technologies, a lot of the abilities to transform our economies into a very much more carbon neutral or even carbon negative model, are coming through the private markets,” said Will Nicoll, Chief Investment Officer for Private and Alternative Assets at M&G Investments. 

“Whether that's private equity or private debt, many of those companies aren't yet at the sort of size that would go to the public markets.”

Compared to public markets that tend to deal with larger companies with multi-strategies, within private markets investors are often dealing with assets that are either single-strategy or projects that can be clearly delineated and measured. When it comes to impact investing, this is crucial.

“If we think that one of the most important things about impact investing is to be able to measure what that impact is, then you end up being driven down the route of private markets,” explained Nicoll.

By dealing with smaller companies, investors are able to drive environmental, social and governance agendas through their interactions and engagements. This is important as many of these private markets firms could become large multinationals at some point in the future, noted Nicoll.

Growth engines

Private markets investors tend to be entering early-growth areas, such as carbon-negative housing. Many of the companies operating in the private markets space offer solutions that could potentially change the way issues such as climate change or social housing are addressed.

“From an impact perspective, you're going to have a key growth driver over the next 20 years as we look to try and fundamentally change many of the world’s economies,” noted Nicoll.

“This is a significant and real shift that's going to require a lot of money, as well as an understanding of risk as we try to work out what the future technologies are and how they're going to work best and fit in with the established markets,” he added.

Aside from the potential opportunities, new risks include dealing with how emerging technologies could disrupt existing assets, such as in the infrastructure space.

It is also necessary to take geopolitical developments into account. These can affect access to markets. When investing in emerging markets, for example, it is essential to take into account any global themes that may change the risks associated with investing in those markets.

While it may be difficult to see potential longer-term opportunities amid the volatility, many areas within private markets could be set to reshape economies.

“A lot of the change that we're going to see over the next 5 or 10 years, whether that's in impact, whether that's in climate, whether that's in emerging technologies, whether that's in energy, are going to come through the private markets,” he said. 

1 Preqin, Alternatives in 2022
2 PwC Global AWM Research Centre, Preqin (ESG in Alternatives: Navigating the climate crisis)

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

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