The numbers speak for themselves. In 2015, the private capital investment sector had total assets under management (AUM) of around US$3.5 trillion, but by the end of 2020, it was estimated that the industry had more than doubled to $7.4 trillion AUM. Looking ahead just four years, this total is expected to double again to $13.5 trillion.
As a trusted, long-time outsourced fiduciary and administration partner to many of the world’s leading private and institutional asset owners and investors, IQ-EQ has had a front row seat to the convergence of both private and institutional players into this private capital space. But what is driving the ‘rise and rise’ of private capital? We’ve identified five key reasons why we believe the only way is up for this sector.
1. ‘Institutionalisation’ and globalisation of private investors
The growth of the private markets has been driven by wealthy private investors and their family offices as well as major institutions and fund managers. Increased globalisation has meant that private investors and family offices have had to turn towards more sophisticated institutional-style processes, capabilities and styles of investing as they move their assets around the world with them.
Ultra-high-net-worth (UHNW) families and individuals are now paying closer attention to how and where they are structuring their wealth – from enhanced asset preservation and succession techniques to a closer focus on ensuring compliance with relevant regulations and tax standards, all of which are more complex in a cross-border environment. Covid-19 has also presented a unique challenge for wealthy investors and their family offices as they make competitive changes to their structures and operations.
By its nature, most of the above-mentioned work is outsourced to specialists. While there are high levels of such outsourcing in Europe, this is still a relatively nascent concept in the U.S. and Asia, where the percentage of work outsourced is small but growing at a significant pace.
2. Low interest rates
We are living in an extremely low interest rate environment. While there are whispers of rate rises in the future, the Bank of England has held firm in its most recent assessment.
This environment has been a key driver in the growth of the private markets, with low interest rates, coupled with low or negative yielding bonds, encouraging private investors to shift their capital allocation to the private markets as a diversification tactic.
Further to this, low interest rates and financing costs mean that alternative/private asset fund managers (GPs) can access capital at a lower cost. This means that they have the unique opportunity to make more affordable investments that will pay off in the future.
3. Volatility of public markets
Amid this atmosphere of low interest rates, public company market valuations are continuing to rise. While the public markets have broadly stabilised from their previous pandemic induced volatility, many consider public companies as still overvalued.
The private markets in comparison were less impacted by Covid-19, meaning that private investors shifted assets across from the public markets in favour of safer, less volatile options to take advantage of additional alpha and enhance yields.
4. Higher yields
In the sustained low-yield environment of the public markets, the private markets offer investors a chance to maintain and grow returns. Due to the investment profile of sectors such as real estate, private equity and other alternative/private assets, which tend to have longer-term horizons that are less impacted by movements within the public markets, these asset classes promise higher yields for investors.
Notably, private capital delivered returns of 12.03% over the past 10 years, compared to the 9.67% average of the MSCI All Country World Index, which represents the performance of large- and mid-cap stocks across 23 developed and 27 emerging economies. Topping the charts on highest returns was private equity at 13.89%, venture capital at 13.19% and real estate at 12.30%.
5. Increased regulation
One of the biggest agenda items investors have in relation to the private markets is the need for transparency, which is enhancing in line with increased reporting demands.
Most private wealth and institutional investors these days have branched out into at least several different asset classes, currencies and geographies. As such, holistic, real time (insofar as possible) and visually useful reporting is now imperative to making investment decisions.
Private investors, their family offices and trustees are all driving demand for accurate, timely and digital reporting and regulation. This is especially the case among the younger generation, as they also want oversight for environmental, social and governance (ESG) and/or impact investing purposes.
Similarly, fund managers need transparency over their alternative asset investments as their investors (LPs) are increasingly demanding to know the resting value of their assets. They are subject to regulation, meaning that they need to know what their position is on an asset at all times.
The Institutional Limited Partners Association (ILPA) is currently working together with investors and regulators to drive increased regulation, and therefore transparency, within the private markets. All of this will naturally lead to increased investment in the private markets by more and more investors as greater transparency is achieved.
The continued rise of interest in private capital is a trend we expect to continue to grow over the coming decades as wealthy private investors, family offices, institutional investors and fund managers become more globalised and sophisticated and want to increase their returns. By offering investors a strong alternative to the public markets, private capital looks set to continue to rise and rise.