Prospects for Private Markets in More Turbulent Times
Private markets saw an unprecedented level of activity in 2021, with Preqin suggesting U.S. PE General Partners participated in over 8,600 deals worth in excess of $1.2 trillion, in an asset class now valued at some $8 trillion. Money flowed into private markets as investors sought alternatives to the low yields available in public bond markets, while some asset owners also found public equity market valuations a little too rich, and sought better value in private equity, despite the significant sums chasing deals. CalPERS for instance, agreed to allocate a further 5% of its $500 billion fund to PE, taking its weighting to 13%, whilst another 5% was committed to private debt. This rebalancing saw allocations in public equities drop from 50% to 42%.
Liquidity has been a key driver of asset markets generally, and private markets in particular. With QE shortly turning to QT, bond yields starting to back up, and some technology stock valuations now being rebased, it will be interesting to see how the concept of the 'illiquidity premium' in private markets affects more recent investors, should markets find 2022 a more challenging year. Several of the papers here explore how private markets might respond to a more challenging economic environment and potential market dislocations, while others highlight the opportunities arising from the need for private capital to help fund the global transition to net zero.
The allocation to private markets investments can be a difficult one for defined benefit plan sponsors. Wellington Management executives suggest a 'start where you want to end up' perspective incorporating both liquidity and return requirements.
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BlackRock suggests that given the changing nature of the investment environment, private markets offer several favourable options for investors.
In this webinar, State Street argues that managers need to become more effective at coping with, analysing, and reporting on, the huge quantities of complex data they encounter in both existing and prospective investments.
In JP Morgan Asset Management’s 4th Alternative Assets outlook, they suggest that for both private credit and private equity investors, the prospects look good as the attractions of higher yield and superior returns from PE continue to draw investors.
PwC’s comprehensive report considers the shift in attitude towards ESG investing across the EU and makes suggestions as to the crucial decisions investors need to consider to best negotiate the changing landscape.
Mercer notes the relative attractiveness of floating rate debt in the private credit space, while considering how private equity characteristics differ quite markedly from other asset classes – which has connotations for portfolio construction, manager selection and governance.
PGIM IAS believes the time lag between private valuations reflecting those in public markets can lead to portfolio imbalances. They investigate the rebalancing conundrum, exploring liquidity and other issues.
The authors of this BIS paper find that despite having much longer investing time horizons, private markets are as pro-cyclical as public markets. They also investigate the financing of private markets and how it reacts to monetary policy – and raise questions about its vulnerabilities and market interconnectedness.
Morrison & Foerster partners discuss the key trends in private equity in 2021 and go on to outline, on both a global and regional scale, what they believe may be some of the more interesting prospects for 2022.