Private markets: Going mainstream

Long the preserve of institutional investors, new fund structures have opened up the world of private markets to a far broader range of investors. Is now the time for all investors to explore the benefits this asset class can offer? 

Until comparatively recently, private markets have been a focus predominantly with institutional investors. These investors have actively sought new, alternative sources of income and ideally, new ways to diversify risk within their portfolios.

A rapidly growing asset class

In many ways, private markets have successfully met these challenges with institutional investors steadily increasing their allocations to the asset class over several years. In fact, today private markets represent around 14% of the typical institutional portfolio¹. A timely question however is whether now is the opportune moment for private markets to expand its investor reach, primarily with wholesale and private investors?

The attractions of private markets

It might be useful to recap what exactly private markets are and their investment characteristics. The asset class is broad and covers investment assets not listed on public exchanges. These include several forms of private and structured credit, private equity, and real assets such as unlisted real estate and infrastructure:

Principal private markets

For investors, the attractions of private markets are broad:

• Alternative sources of return: Many private market investments are not readily available on public markets. For example, private equity invests in small, high growth enterprises often in sectors or product areas not represented by publicly listed companies. In the US, 87% of companies with a turnover more than US$100 million are unlisted companies². Private markets offer investors a larger and more diverse investment universe.
  
  
• Sustainable income: Private real assets, which include infrastructure, are often involved in heavily regulated, essential services such as water, power generation and transport. These businesses are long duration, capital intensive, with pricing models often inflation-linked. For investors this can provide resilient, long-term, inflation-protected income streams.
  
  
• Portfolio diversification: Statistically, private markets have a low or negative correlation with either public equities or public bonds³. Including private markets within a portfolio may therefore lower the overall risk within a portfolio.
  
  
• Secular growth trends: Private markets are particularly well-positioned to leverage several key global growth themes. Energy transition, 5G and AI, infrastructure replacement, affordable housing etc are likely to be growth drivers for many years potentially delivering attractive returns.   

An asset class for all?

Given the spread of benefits private markets can offer, why would a wider investor audience not wish to participate? Retail and wholesale investors only have 5% of their investments held in private markets⁴. The investment solutions the asset class provides to institutions are of equal relevance to most other investors. Many seek dependable income streams to fund retirement, school fees etc. Real assets, a core option within private markets, largely comprise directly held real estate and infrastructure businesses. These are obvious providers of long-term reliable income streams.

“Private markets are now an asset class for all.”
 

The reasons for the relative reluctance of non-institutional investors to embrace private markets more fully have principally related to accessibility, regulation, liquidity or an incomplete understanding of its nature and role in investing.

Widening access for all

Responding to these concerns, within Europe and the UK especially, governments and regulators have taken steps to widen private market access to private investors. The introduction of open-ended investment vehicles such as European Long-Term Investment Funds (ELTIFs), and Long-Term Asset Funds (LTAFs) in the UK, are facilitating access for private investors into the asset class. 

These vehicles offer greater accessibility, regular pricing, and the opportunity to more easily buy/sell private market investments. Regulation has improved post the Alternative Fund Managers Directive a few years ago, including strict criteria regarding diversification and currency exposures. If widely embraced, private investors are set to become a significant part of the investor base for these assets. 

But a longer-term issue is addressing the knowledge gap. Some private investors are familiar with private markets eg wealth clients who have used private equity for years, but for a large number of wholesale and retail investors, this remains an unfamiliar and curious area of investment. With new investment vehicles now available, advisors and asset managers have a clear responsibility to start filling in this knowledge gap.

Too big to ignore

Already a $13trillion asset class, with 20% p.a. growth over the last 5-years⁵, this is an asset class now too large for any group of investors to ignore. The combination of leverage to long-term growth drivers, greater accessibility, and a greater understanding of the role that private markets can play in achieving a broad spread of investment objectives, should ensure this asset class moves firmly into focus for a far wider range of investors.

ELTIFs are illiquid in nature because their investments are long term. For investors, this is an investment that has low liquidity. ELTIFs may not be suitable for Investors that are unable to sustain such a long-term and illiquid commitment. Only a small part of a portfolio should be invested in an ELTIF.
 

¹ Schroders Institutional Investor Study, 2022
² Capital IQ, 2023
³ Morningstar, Pitchbook, March 2024
⁴ Bain, 2023
⁵ McKinsey, 2023

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.