Expert: Dr. Lulu Wang, Portfolio Strategist – Global Private Markets' Solutions, abrdn Moderator: Rupert Phelps, Independent Consultant
- Private markets, including private equity, private credit, real assets such as real estate and infrastructure, and natural resources have experienced a notable surge in their proportion within the investable universe
- This increase signifies a growing prominence and attractiveness of private markets among investors
- Factors driving this trend likely include the pursuit of higher returns, lower volatility, and diversification opportunities in comparison to traditional public markets
- The expansion of private markets presents new challenges and complexities, requiring deeper due diligence and specialised investment strategies
- This rise underscores a shifting investment landscape and suggests a broader acceptance and adoption of private market investments among a diverse range of investors
Reasons for the growth include:
- Higher returns than public markets historically, lower volatility, and low correlation to other assets
- Increasing interest in private markets from a wider range of investors beyond large institutions like pensions. This includes high net worth individuals, family offices, and retail investors gaining access through things like investment trusts
The difference in valuation methodologies between private and public assets was debated. Private valuations are seen as less frequent, more subjective, and presenting issues like conflicts of interest. However, the underlying businesses are fundamentally the same. Benchmarking private against public returns is also challenging due to less frequent valuation.
Different private asset classes have varying risk, return and cash flow characteristics. For example, infrastructure can have equity-like returns or more bond-like predictable cash flows depending on the type. Private credit provides high yields but lower risk than private equity. Natural resources are essential but present challenges around the climate transition.
In terms of managing private investments, a disciplined process is critical, including proper manager selection, due diligence, risk management and ESG integration. Liquidity and redemption options can be created but fundamental long-term holdings are key.
Growth of private markets:
Assets under management in private markets like private equity, private credit, real estate, infrastructure, and natural resources have risen from $5 trillion to over $10 trillion in the last 10 years. Reasons include higher historical returns than public markets, lower volatility, and low correlation to other assets.
Increasing investor interest beyond institutions:
There is increasing interest in private markets from high-net-worth investors, family offices, and retail investors gaining access through things like investment trusts. However, some wealth managers still show reluctance to allocate.
Valuation differences vs public markets:
Private valuations are seen as less frequent, more subjective, and presenting issues like conflicts of interest compared to public markets. However, the underlying businesses are fundamentally the same. Benchmarking returns is also challenging due to different valuation methods.
Risks and challenges:
Key risks of private markets discussed include complexity, illiquidity, lack of transparency vs public markets, and moral hazard in valuation. Analysis of risks like climate impacts is important, along with due diligence, understanding long-term nature, and diversification.
Comparing private asset classes:
Different private asset classes have varying risk, return and cash flow profiles. For example, some infrastructure can provide equity-like returns or more predictable bond-like cash flows. Private credit offers high yields with lower risk than private equity.
- A disciplined approach to investment management, considering diversification and ESG integration, was highlighted as essential in navigating the complexities of private markets
- Review current private markets exposure and determine if target allocations should be increased based on the demonstrated growth and investor interest
- Assess private investments through a long-term perspective, ensure proper due diligence, and use technology to analyse hard-to-quantify risks
- Compare private asset classes like private equity, private credit, real estate and infrastructure to understand the differences in expected returns, cash flows, risks
- Evaluate managers' private markets capabilities and track records, especially through different economic cycles
- Discuss with wealth management advisers their willingness to recommend private market exposures to clients and any reservations