Private markets are very much the zeitgeist investment. Just take a look at the numbers. Alternative assets under management totalled $13.1trn (£10.6trn) in June 2023, having grown by nearly a fifth in each year since 2018, according to McKinsey.
Industry estimates now expect this to expand by more than $20trn (£16trn) by 2030. These impressive numbers present a strong narrative for private assets.
Emmanuel Deblanc, chief investment officer of private markets at M&G Investments, says the growth of private markets is likely to remain strong, driven by structural and cyclical factors. “The expansion is supported by the democratisation of private markets, with new products and regulatory changes allowing a wider range of investors to access these assets,” he adds.
One of the key appeals is that private markets play a critical role in addressing long-term global challenges, such as infrastructure upgrades, climate finance and sustainable food systems. “The resilience of private markets during periods of volatility also enhances the appeal, positioning them for sustained growth in the coming years,” Deblanc says.
More specifically, the popularity of private markets comes from the obvious benefit of such investments being less correlated with their public asset portfolios.
For Deblanc, this is not the only attraction. “Investors are drawn to the ability of private markets to align with impactful themes, such as the energy transition, financial inclusion and climate resilience, which can deliver financial and societal returns,” he says.
This hasn’t always been the case. There has been something of an evolution here. “If you go back 20 years it was quite difficult to invest in private markets,” says Richard Tomlinson, chief investment officer of Local Pensions Partnership Investments (LPPI). “But in that time, the architecture and eco-system around private markets has developed dramatically.”
The approach to private markets therefore has changed.
“There was this view, which I reject whole heartedly, that you only invest in private markets if it gives you a return uplift – a premium compared to public [investments]. While I understand that, it is not a universal truth for everyone,” Tomlinson says. “That comes from if you are liquidity constrained,” he adds.
“Whereas, if you are not liquidity constrained, there is a slightly different conversation. It means you can invest in private markets because you like the asset or a pure play to exposure to a certain theme, or it has different sustainability characteristics.”
Within LPPI’s private markets approach it has a focus on UK infrastructure, which is backed by GLIL, a pension scheme-funded investor. It also has a large chunk of private credit, as well as a private equity portfolio.
Long-term benefits
What should not be overlooked, and alluded to by Deblanc, is the strong case for private markets over the longer term. In an example of its resilience, a study by Schroders highlights the proven track record of private equity to outperform during downturns.
“Global private equity outperformed the MSCI ACWI Gross index during each of the major disruptions with an average annualised excess return of 8%,” says Verity Howells, investment research manager private equity at Schroders Capital.
“Even in the depths of the dotcom crash, where private equity was challenged due to its exposure to early-stage technology companies at the heart of the bubble, it still fared better than public markets,” she adds.
And stressing the point further, amidst the uncertainty surrounding Covid, private equity achieved annualised returns of 18%, while public markets delivered only a 2% return.
This resilience, Howells attributes to something of a different industry sector mix compared to public equities, and long-term capital structures that allow investors to hold investments and continue to deploy through market disruptions. This bodes well for investors into the future.
In addition, private equity firms typically target less cyclical industries, such as healthcare, business services and technology, while limiting exposure to banks and heavy industry. They favour less volatile cash-generating recurring revenue business models.
“The nature of private equity returns, which partly reflect unrealised gains, contributes to less volatile reported returns,” Howells says. “These unrealised gains are based on changes in portfolio valuations and are guided by fair-value accounting. Post-reporting period developments can influence these valuations, as firms may incorporate recent positive events into their assessments.”
Therefore, one big proviso in looking at a more long-term outlook for private equity is, it should be noted, that the industry changed considerably between the dotcom crash in the early 2000s to the return of inflation in 2022, in terms of regulatory and accounting considerations, which could impact historical comparisons.
The financial crisis served as a catalyst for introducing more rigorous fair-value assessment practices, potentially resulting in private equity valuations having had less frequent mark-to-market assessments prior to that period.
But private equity should not just be seen as a positive investment in a past tense.
In 2025, spurred by a more supportive rate environment and a restart of M&A and IPO activity, private equity is set to get a boost, says Brent Patry, head of equity private markets at Blackrock. “In our opinion, this will lead to a lot more activity across private equity, as firms look to deploy dry powder,” he adds.
Positive trends in deal activity support this opinion. While still below the pandemic peak of 2021, deal activity in 2024 was up by 21% compared to the previous year and outpacing the pre-pandemic average by 45%.
There will also be further developments.
“New structures will continue to rapidly evolve as new investors enter the market. These investors are largely accessing private assets through evergreen fund structures and European long-term investment funds,” Patry says.
Private lending
Going forward, Blackrock believes private debt and infrastructure will grow the fastest within the private markets arena.
As private debt continues to cement its status as a sizable and scalable asset class for a range of long-term investors, what is of interest is there is plenty of room for growth. At $1.6trn (£1.3trn) in global assets under management, the asset class accounts for 10% of the $16.4trn (£13.3trn) alternative investment universe. The momentum behind the growth of private debt is being driven by a few major factors.
“Private debt is taking on more funding previously executed in the public markets, which increasingly focus on deals that are prohibitively large for most middle-market companies,” says Adam Ryan, chief investment officer of multi-alternatives at Blackrock.
“Companies are also relying on private lenders more for financing as they stay private for longer,” Ryan says. “And they have come to value the certainty of execution and flexibility that private debt provides. At the same time, banks are more selective in how they use their capital. Lastly, investors have an increased comfort and familiarity with the asset class.”
In addition, the definition of private debt continues to expand as private debt investors start to participate more in asset-backed finance, Oliver Wyman believes.
The market share of asset-backed finance held by private lenders is estimated at roughly 5% today, and private lenders are poised to fill in the gaps left by banks, as they have within corporate credit and real estate. “We expect this trend to accelerate in 2025, alongside growing appetite for such private-debt investments globally, most notably from US insurers,” Ryan adds.
Private debt is also becoming more global. While North America represents more than 60% of total private debt assets under management, Europe and the Asia-Pacific have been growing.
Today, these regions are more reliant upon bank financing, suggesting a noteworthy opportunity for private debt to expand, similar to the diversification that has taken place in the US.
But there are other factors sparking investor interest. Blackrock has identified a trend that could help shape investor appetite in a number of asset classes.
“Investors can access the transformative possibility offered by artificial intelligence through infrastructure, as well as debt, private equity and real estate,” says Adebayo Ogunlesi, chair and chief executive of Global Infrastructure Partners, which is part of Blackrock.
A political animal
Another factor driving private markets is politics. Politically, private markets are hot investments. Governments around the world have taken a great deal of interest in nudging defined contribution pensions towards investing more in alternatives.
The UK government is at the forefront of this development, wanting pension funds to back more private assets.
In addressing the government’s private markets push, Tomlinson cites two sides to it. “It is now known that the government is looking closely at the supply side, on infrastructure anyway, associated with the likes of planning. My personal view is that they will push that through.
“On other areas, the government has made it clear that they want more investment,” he adds. “That is a little bit more challenging. I certainly get the aspiration. It is a little bit harder on the venture capital side. For that, it is more about creating the pathways to move forward from.”
In another initiative, chancellor Rachel Reeves announced in her Mansion House speech that the government is committed to establishing PISCES – the Private Intermittent Securities and Capital Exchange System – a platform for trading unlisted company shares, providing shareholders in eligible companies with liquidity and a route to exit.
What this will all mean only time will tell. But the investor industry has hardly been enthusiastic about this initiative thus far.
Inevitably, this governmental push is another contributing factor in boosting alternative assets. “Private markets are evolving rapidly and becoming more accessible to a broader range of investors,” Ryan says. “Governments and regulators around the world have taken an interest in giving de ned contribution plans more access to private markets.”
This so-called democratisation of private markets nevertheless comes with challenges that investors need to be aware of. “Ensuring that private markets are effective within the portfolios of these new investors calls for portfolio construction expertise to build diversification, while providing a degree of liquidity,” Ryan adds.
The usual suspects
Given the expansive nature of private markets, how can, and should, institutional investors take a step back and use private markets within a portfolio? “Private markets play a critical role in institutional portfolios by offering diversification and supporting long-term strategic goals,” Deblanc says.
“They are particularly well-suited for funding essential projects like the energy transition and infrastructure, which can deliver stable, inflation-linked returns,” he adds. “Private markets also serve as a hedge against short-term market volatility, allowing for a focus on sustainable value creation.”
When it comes to the appealing segments within private markets, it is a case of what you would call the usual suspects. “Long-term themes such as infrastructure due to the energy transition and impact-focused investments in areas like climate nance and financial inclusion. These align with structural trends and investor demand for sustainability and long-term value creation,” Deblanc says.
But there are others. Another area of growing appetite for sophisticated investors, but one not part of the usual suspects is significant risk transfers (SRT), which allow banks to offload their credit risk while offering investors attractive returns. “We expect interest in SRTs to broaden over time, with significant opportunities in Europe driven by recent regulatory changes,” Deblanc says.
Re-shaping economies
Other forces are helping to shape private markets. “A new wave of investment into the real economy should help transform markets, as more companies stay private for longer,” Patry says.
Bill Hughes, global head of private markets at Legal & General, says that with the rise of private markets as a major investment theme, there is an increasing demand from institutional investors for investment strategies that are not only commercially competitive, but also sustainable and impactful.
“We have developed a long-term structural framework to guide our investment strategy around four powerful megatrends that we believe are reshaping the global economy: demographics, decarbonisation, digitalisation and deglobalisation,” he says.
“These trends will be positive for a number of sectors and that portfolios embracing them may see outsized risk-adjusted returns,” he adds. “We see these mega-trends as particularly beneficial for infrastructure supporting the energy transition, residential real estate, urban logistics and assets or companies associated with the digital economy.”
Sustainability and its related issues are therefore major themes driving private markets. “There is significant, persistent demand for solutions to society’s biggest challenges, such as the climate crisis, housing crisis, socio-economic regeneration – and this presents a huge opportunity for investors,” Hughes says.
Another key factor driving growth in private markets can be attributed to the rise of illiquidity budgets as the UK looks to increase investment into productive nance and mobilise pen- sion capital to drive domestic growth.
To unearth investor trends, Legal & General undertook a comprehensive study of UK institutional investors’ attitudes to private markets. The study explored how institutional investors are planning their future private markets portfolios, highlight- ing key allocation drivers and the increasing importance of impact and sustainability mandates.
The survey found that more than 70% of institutional investors are investing in each of the main private asset classes – private equity, private credit, infrastructure and real estate.
However, the key thematic trends most institutional investors seek to ad- dress through private markets are climate transition/decarbonisation, digital transformation/AI and digital infrastructure.
Of the four main private markets assets surveyed in the UK institutional survey, asset owners are looking to increase their allocation the most in the following order: infrastructure, venture capital, private credit and real estate.
Interestingly, the research showed that institutional investors are increasingly targeting clean energy/renewable energy – believing that it offers the best investment opportunities.
Reasons to be cautious
There are though reasons to be cautious about some aspects of private markets. “The scale of patient capital required for projects supporting the energy transition and infrastructure is immense, and these are often complex to execute and requires specialist skills,” Deblanc says.
“It underscores the importance of due diligence, combined with depth of experience, which helps us identify and mitigate risk effeectively,” he adds. “This is where a proven track record of active management matters.”
Moreover, private markets are not one big whole. “Private markets are not one homogenous blob,” Tomlinson says. “Trading in the equity of private corporations is one thing, or originating private credit is different from classic private equity and infrastructure.”
An important point investors should be, and no doubt are, fully aware.
But for all that, private markets are set to grow further and become even more important to institutional investors.
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