The big deal in private markets

Private markets are on a roll. Partly driven by expectations of higher returns, investors are allocating more money to the alternatives market. It is a multi-year trend, with the total assets under management in private markets at US$13.1 trillion in mid-2023, with just over US$1 trillion raised during the year¹.

The entire private markets spectrum was the subject of a panel discussion at the Private Sessions of HSBC’s Global Investment Summit, which assembled senior representatives from different parts of the alternatives spaces – covering private equity, private credit, real estate and infrastructure.

The panel shared a number of reasons for the growing popularity of private markets.

For a start, there is some dissatisfaction with public markets. While a country’s universe of stocks should provide diversified exposure to the national economy, some of the most widely followed indices are highly reliant on a small number of companies for their performance. Public markets can also be very sensitive to fluctuations in liquidity, which can sometimes override considerations related to fundamentals.

Furthermore, it is easier than in the past for a wider range of investors to gain exposure to private assets. It used to be the case that private markets were only accessible to institutional investors, but open-ended funds have opened the market to private wealth managers.

“I hear the same thing wherever I go in the world: everyone wants more public markets,” said Joan Solotar, Global Head of Private Wealth Solutions, Blackstone. “They want more access, they want to understand how these fit alongside their public holdings, they want education, and they want quality."

In terms of geographies, Asia is a notable growth region for private markets. The region has shallow capital markets and is still heavily reliant on bank funding to supply growth capital. At the same time, the Asia has enormous long-term funding requirements.

“In Asia, there are opportunities that require more long-term patient capital that can invest through cycles of capital market ups and downs,” said Ming Liu, Executive Chairman, Asia Pacific, KKR. “This is where private market funds can do a much better job in funding growth than the public market.”

Perhaps the most common conception of private markets is private equity deals, hedge funds, and venture capital. But the alternatives space is much more diverse than this.

Private credit for example, has in recent years emerged as an important source of capital for corporates. This is due to an ongoing trend of debanking, as regulators have pushed banks to avoid lending activities that are considered high risk or operationally intensive – such as leverage lending, trade finance, and structured finance.

The end result is that a broader range of lending is taking place in private markets.

“Now that a lot of the lending that was done by the banks is now in the investment marketplace, you now have safe alternatives, risky alternatives, as well as safe public and risky public loans,” said Matthew Michelini, Partner and Head of Asia Pacific, Apollo.

Commercial real estate is another area that is attracting attention, as technology alters the way we work and live. The growing popularity of working from home has changed the outlook for traditional office buildings, while ecommerce has made shopping malls a less attractive investment destination.

But the panel highlighted how there are new opportunities in real estate. Student housing for example is one area of note, in part because demand for this kind of accommodation tends to be recession proof. The ascent of artificial intelligence has created strong demand for data centres. For both kinds of properties, it can be challenging to gain exposure via public markets.

Infrastructure is another growth area, especially in Asia, where the region’s developing economies need to invest 5% of GDP to close the infrastructure gap, around US$1.5 trillion per year². This not only includes traditional forms of infrastructure – such as roads, airport and ports – but also newer forms of infrastructure that will help address climate change, which includes charging points for electric vehicles and solar panels.

The panel also discussed the balance between public and private assets in a portfolio. The answer depends on the kind of investor, liquidity needs, and risk profile.

For institutional investors, the allocation is typically capped at around 20%. But optimal allocation for private wealth investors, as well as endowments and foundations, can be significantly higher, with panel suggesting that it could be as much of 50% of a total portfolio.

There are a number of factors to consider. Liquidity is a key consideration, with the panel stressing that the long-term nature of the investments often requires capital to be locked up for longer than mutual funds, where redemption is relatively quick. They also stressed the importance of finding the right manager, as the gap between good and bad performers is larger than in public markets.

Overall, the expert panel gave a broadly positive account of private markets – an increasingly important part of the investment universe that is not only growing in size, but also in terms of diversity of available assets and accessibility to a wider range of investors.