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Investors are increasing their allocation of capital into private market investments such as such as private equity, private debt, real estate in the past several months as traditional asset classes faced several challenges such as historic lows in fixed income yields and a volatile equities market, new report by Investcorp said.
This pivot away from exposure in traditional public market assets and into private markets has in turn led to the growth and increased focus on investment opportunities in private markets, the Bahrain-based asset manager said.
“The resilience of private markets’ performance during the volatility and uncertainty that defined the past 18 months, supports robust investor allocations to these asset classes,” said Richard Kramer, Head of Risk Management at Investcorp.
Capital flows into private markets asset classes has driven rapid assets under management (AUM) growth of private markets relative to public markets and the investor base has broadened to include institutional and private investors, the report said.
Investor fund flows into private markets asset classes, together with capital appreciation, has seen AUM in private markets asset classes grow at a rate of 11 percent between 2003 and 2019, reaching $15 trillion in 2019, growing nearly twice as fast as public markets AUM which saw growth of 6 percent over the same period, the report said.
A key attraction of private markets for investors is the track record of delivering higher returns than public markets. According to research by Cambridge Associates, the global PE index has outperformed MSCI World index by around 500 bps on average when compared over time periods which vary from five years to 25 years.
Portfolio challenges
The increase in capital flowing into private markets has led to an increase in number of products to serve investor needs.
Product diversification enables investors to structure investments to focus on specific geographies, or sectors, or different levels of the capital structure, to gain exposure to desired growth drivers for a given risk profile.
More capital has also meant more managers, driving both competition and innovation.
“However, constructing a portfolio of private market investments is just as great an opportunity as it is a challenge, and yielding a substantial return from the market requires careful consideration of the value proposition and prevailing macro environment,” Kramer added.
As investors seek to capitalize on megatrends such as aging populations, ESG, AI, climate change and the redefinition of global trade, private markets have to offer a range of asset classes and duration profiles to provide exposure to these long-term trends.
Timothy Mattar, Global Head of Distribution at Investcorp said: “As private markets mature further, we expect to see product designs and structures evolve to cater to changing investor appetites and capitalize on new investment opportunities.”
(Writing by Brinda Darasha; editing by Seban Scaria)
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