Despite equities and bonds acting as a balancing scale for the past two decades, the asset classes started to move in tandem in 2022, leaving managers in search of a new diversifier. And as businesses remain cautious about entering the public sphere, eyes have turned towards private markets as an opportunity to generate alpha while diversifying a portfolio.
In both the US and the UK, household-name companies remain private, including Monzo, Bloomberg, SpaceX and Chick-fil-A. Tech businesses have also trended towards the private route and in the UK, a string of public companies have been acquired by private equity firms.
Rob Morgan, chief analyst at Charles Stanley Direct, says: “There is a gradual realisation that public markets don’t have a monopoly on investment opportunities. Some of the most innovative and appealing companies are in the hands of private holders, often founders and exclusive bands of early investors in the case of relatively new businesses.
See also: Bain & Company: Private markets to make up 30% of AUM by 2032
“Many companies, especially growing tech firms, are staying private for longer. It’s not just earlier-stage businesses, though, the stockmarket has been getting progressively narrower for some time.”
From 2021 to 2023, global initial public offerings have fallen by 45%, according to management and consulting firm Bain & Company. However, it estimates that rate of private market assets under management (AUM) will increase 9-10%, making up 30% of all AUM by 2032.
Aaron Hussein, global market strategist at J. P. Morgan Asset Management, says: “The growing popularity of private markets has characterised the past couple of years. Reflecting on 2022, a challenging year for many investors that exposed the limitations of the traditional 60-40 stock-bond portfolio, this period also underscored the potential benefits of private market alternatives.
See also: Lazard launches Listed Private Markets fund
“As global stocks faced their steepest decline since 2008 and global bonds suffered their worst annual performance on record, private real assets such as transportation, infrastructure and timber stood out with impressive double-digit returns.”
Because private assets cannot easily be recreated on an index, they also provide a unique opportunity for active fund managers, who in the public market are fighting a battle against passive products.
Read the rest of this article in the September issue of Portfolio Adviser magazine
