Once the preserve of a relatively niche set of players, private capital markets are increasingly becoming part of the mainstream. As of 2020, this market represented more than $7.3tn worth of assets under management, globally. Given their size — and the fact that an ever-wider range of investors, from large asset managers, pension funds, sovereign wealth funds and family offices to high-net-worth individuals, are investing in them — it is debatable to what extent their status as an ‘alternative’ investment still stands.
The same McKinsey report highlights that, as of last year, there were more than 11,000 investment firms active in these markets — a number than has grown by 8% per year since 2015.
There are several factors driving this growth, but perhaps most potent is the simple fact that the persistently low interest rate environment and stock markets that have been trading at record highs lately means that it can be increasingly difficult to generate strong returns in the public markets.
This influx of new investors, as well as a large pool of companies seeking capital, is also changing the nature of what was previously a somewhat freewheeling industry to one that, by necessity, is becoming more structured and standardised. Bankers, who themselves are ever-more active in this space as intermediaries and advisers, describe the process of matching investors with issuers as an increasingly considered one.
So far, many large allocators, including pension funds, have only assigned relatively modest shares of their portfolios to private assets. But if, as is expected to happen, these sums continue to grow, the private markets will increasingly find themselves in the spotlight.
If these markets are really as lucrative as the increasing investor interest seems to suggest, there is likely to be growing clamour for greater retail investor access. This is an opportunity for those who are able to broker such access, perhaps, but it would also clearly pose challenges from a regulatory perspective.
Finding the sweet spot of maximising access and liquidity without foregoing the benefits of being private, versus public, will be a key challenge for these burgeoning markets.
