In the public versus private debate, who’s winning?

Private markets have increasingly captured investor attention over recent years. However, public markets still dominate most portfolios. Here, the chief investment officers (CIOs) of M&G Investments debate the merits and drawbacks from choosing one over the other.

For several years private markets have seemingly captured an ever-increasing share of investors’ attention. Intrigued to explore the factors behind this shifting investment landscape, M&G Investments recently hosted a panel discussion where our three CIOs, representing equities and multi asset, public fixed income and private markets, met to explore the forces reshaping global capital allocations.

During the discussion factors including economic shifts, geopolitical tensions and technological advances were identified as key drivers changing investor behaviour. The prime focus of the panel was a debate, given the rise of private markets, on the future role of public markets.

Panel participants:

Fabiana Fedeli (FF), CIO Equities, Multi Asset and Sustainability

Andrew Chorlton (AC), CIO Public Fixed Income

Emmanuel Deblanc (ED), CIO Private Markets

 

Q. Will public assets continue to be a cornerstone in investors' portfolios?

Fabiana Fedeli: Yes, I believe so, for three main reasons: firstly, public assets have performed very well for investors, particularly equity markets; secondly, investors have different cashflow needs – they cannot always wait a long time to access this cashflow so liquidity remains an important factor; and thirdly, public markets are simply so much larger than private markets.

I would also note that over the past 5 years, the S&P 500 has actually outperformed private equity, and over the past 3 years even the MSCI ACWI index has outperformed private equity¹. Investors do not always get repaid for the liquidity risk they are taking. However, to build resilience a portfolio should be diversified, and I think both public and private markets should be part of that.

Q. How do you view the role of passive investing when cost and efficiency are so important?

Andrew Chorlton: Not surprisingly, I would strongly make the case for active strategies, particularly in fixed income. The reason for this focus on an active approach within fixed income is that with equity markets, if the equity market is growing you are participating in the success of those equity stories. That is not necessarily the case with fixed income where the growth of this market may just be reflecting growing indebtedness, which is not always a positive thing.

Where active fixed income really comes into its own is the new issue market. There are probably 10 new issues a day in Europe with perhaps 20 a day in the US. Index funds cannot participate in those opportunities. A challenge however is with single-strategy type portfolios which are very narrow. In some parts of Europe, you will have a European government bond strategy investing in bonds with maturities between 5 and 7 years. That is not giving an investor a lot of flexibility so probably not worth paying a manager for – then, in my view, it would be best to go passive.
 

Q. What are the prime benefits to investing in private markets v public?

Emmanuel Deblanc: If you are able to forgo some liquidity, then private markets are a compelling proposition. There is also the broader theme to consider, which is allowing retail investors, rather than just large institutions and sovereign wealth funds, access to the long-term returns private markets can deliver.

I would also flag the ability to capture more diversified assets. Clearly public markets offer access to many distinct parts of the economy, but not all. For example, within tech, there are definitely some parts of that sector not readily accessible through public investment, private is the only way to get exposure.

A further merit of private markets relates to market timing. Given the extended time period required to make many private market investments, there is breathing space which allows flexibility in the timing of actually making the investment. This gives you some protection from violent swings in public markets. This has the effect of smoothing returns in private markets.
 

Q. Emmanuel, you mentioned democratisation of private markets. What is the benefit to retail investors?

ED: For a retail investor, they should focus on the two prime benefits. First, diversification and the lower volatility in your portfolio you benefit from as a result. Private markets provide that by allowing you access to investments you otherwise would not have. The second is the excess spread that you should expect.

Retail investors need to be aware of the risks as well though. Private markets are clearly less liquid than public markets. Everyone is likely to face sudden calls for cash in their personal lives at some point, so that needs to be considered. Also, diversification was mentioned, but normally you need to be invested in a private markets strategy for 5 years to really see the diversification impact. For that reason, with our retail focused products we have structured them in a way that more of the diversification benefits are available straight away.
 

Q. What are the challenges of integrating both public and private markets?

FF: Addressing one point that both Andrew and Emmanuel made, which I think is especially important, is the issue of accessibility of the markets. Earlier you were mentioning passives within public markets and, in my opinion, the reason passives have done well is not because they’re passive per se, but because it’s so easy to access an ETF as opposed to mutual funds.

So, as we get tokenisation, as we get active ETFs, I think that will be a gamechanger for democratising markets, and creating broader access. It will also likely change the balance of the active versus passive discussion.

Regarding how you balance public and private, I am a big believer that, 10 years from now, there will be more seamless access to attractive investment opportunities across asset classes, meaning that any portfolio will be able to invest in opportunities that span both public and private assets, regardless of defined asset class.

Importantly though, investors need to understand what is inside those assets. We do not invest in private assets because they’re private and we don’t invest in public assets because they are public.

We invest in the companies, so if we like a company that is listed, we buy into that company. If we can’t find that company in public markets but we can find it in private markets, then we buy into that company – but we’re buying into the company, we don’t buy into a concept of an asset class.

There is one powerful component when it comes to the public versus private debate, and that is that every company before being public has been private. One of the things that we’ve been doing is creating, for example, a private to public strategy whereby you invest in a private company and then you help that company become public and then you harvest the alpha on the two sides of the IPO (initial public offering), because generally, a private equity fund will either leave some money on the table before the IPO to make it successful, or will try to reap every single penny before the IPO and generally the company will be highly valued when it lists.

If you are there as an asset manager, you’re straddling the two sides and are able to reap alpha from either side of that IPO. So, there’s more of this that we can do, and I think clients will appreciate this, as it’s not so much about asset classes as it is about what a company’s underlying business actually is. 
 

Q. What is a reasonable allocation to private markets for a diversified portfolio?

ED: On the first point on what is the reasonable one, I think it is very much looking at what your time horizon is and your liquidity spectrum, so think about endowments and pension funds. Those long-dated obligations, they should be there – and they are. Canada is good example where some funds had 50-70% of private assets exposure and that’s served them well, it’s a very well-funded system. The Australians have done a particularly good job as well and I think some countries in Europe could actually have done well in allocating or funding their system in a similar fashion.

For retail investors it is the opposite of that because with their ‘portfolio’, you already have private assets – your house, your flat – which are pretty illiquid in reality. That is a simplified way of looking at it and where people are probably settling: a 10-25% allocation for retail investors is good, for insurers 20-30% and pension funds anywhere between 20-60%, so there remains a lot of inconsistency within the investor universe.
 

Q. How has recent volatility in inflation impacted the case for private markets?

ED: Well, what is most shocking I think in the last few years has been the uncertainty of inflation and the value of hedging yourself against that. Some real assets offer that over the long run and that is a value that you do not pay for really. It is also present in private credit – a lot of the private credit paper is floating rate with inflation flowing through nominal rates and therefore you get an inherent protection there as well. It is not a specific allocation to ‘inflation protection’, but it’s an important dimension when you look at what you’re exposed to.
 

Q. What are the largest sector themes investors need to be aware of?

ED: The big themes are driven by what is going on in the world, which can be a bit messy or chaotic. The first one is a reboot of Europe which is its need to be more autonomous on energy security and its economy needing to become more dynamic. That is a massive opportunity for many areas of investment but specifically for private credit because you’re going to need to fund the whole economy to make that happen.

There is also a new level of capital spend that is occurring because we need that convergence. This is obviously happening in the energy sector which is crucial for national security, alongside a lesser reliance on imports of gas and other fossil fuels. We need energy to be localised, to be less dependent on potentially unreliable global suppliers.

So, the resilience and autonomy of Europe is a big topic, one which is being accelerated by the change of policy in Germany. In March they voted for a partial removal of the debt brake and for a significant uplift in spending, so the trajectory of the European economy is changing. We’re talking about another 15 basis points on the average annual rate of eurozone GDP growth until 2030, potentially resulting in 1.5% higher GDP in 2029/2030 – it’s very significant because it’s incremental and that creates opportunities across the board. I think we’re well positioned to get that but for investors that’s really a gamechanger because there’s a sense that Europe really does need to catch up.

Where there is an issue for Europe is that in a trade or economic war, Europe has the talent but suffers from a shortage of capital. It might sound weird, but European capital markets are inefficient, very fragmented, and not big enough. We have entrepreneurs and talent, but once they get to a certain size, they take off and go to the US looking for that scalable capital. This is what needs to happen to create an alternative to the US tech ecosystem. That is the other big leg of the opportunity – you can’t have a successful economy going forward without actually grasping the opportunity of the step change happening in tech.

 

Closing reflections:

The panel concluded with a shared belief that flexibility, diversification, and company-focused investing is the optimal approach to investing going forward:

• public and private markets are not mutually exclusive, rather complementary.
• investors need to understand what they own rather than just an allocation to an asset class.
• liquidity, while valuable, should not overshadow long-term strategic goals.

The panel discussion underscored the importance of resilient, future-fit portfolios able to adapt to changing market dynamics while remaining grounded in fundamentals.