The Rise of Private Markets: A Shift from Public Markets to Alternative Investment Opportunities

News: Insight & Opinion | 5 September 2023

Our newsletter

Over recent years, a significant shift has been quietly taking place in how companies are financed. Public (stock) markets have traditionally been the mainstream option for those looking to invest in businesses, while private markets (which include private equity and private debt investments) were viewed as something of a niche alternative option. 

Today, private markets have firmly entered the consciousness of the investor community, proving increasingly appealing to both institutional and private investors, to the extent that they are now a vital mainstay of business funding alongside public markets.

The growth of private markets

Although the total value of private markets is still dwarfed by that of public ones, the growth in private market interest and importance is evidenced by comparing private market fundraising with the amount of new capital raised annually on the public equity markets. Analysis by Partners Group shows the former substantially outstripping the latter since the middle of the last decade. Last year, private market fundraising was worth around $1 trillion, more than double the level of public market issuance[1].

The signs are that this is a trend with further to go. Research by State Street among global institutional investors found that three-quarters of respondents are expecting to maintain or increase the amount they invest into private markets in the coming year[2]. This echoes our own client survey among UK high net worth (HNW) investors, 88% of whom say the same about their alternative asset investment plans over the next 12 months.

This deepening pool of available capital reinforces the idea that private investment is a credible route for owners of established, growing businesses seeking funding to take. No wonder companies are typically staying private for longer. A study by the found that the average ‘age’ at which companies with venture capital and buyout backing go public (the period between founding and an IPO) was 11 years between 2001-2022, compared to five years at the turn of the millennium[3].

What’s fuelling increased appetite?

  • Diversification opportunities – As investors search for ways to broaden sources of risk and returns in their portfolios by diversifying the types of assets they hold, they are moving away from the traditional 60:40 equity/bond construction. While equities and bonds still have their place, many are now including substantial allocations to alternative investments - often as much as 30% or even more of their portfolios[4] - into the mix to improve returns and reduce volatility.

Since many alternative assets have little or no correlation to the factors influencing movements in public markets, they can provide a good hedge against public equities. Plus, there is a wide variety of types of alternative assets in the private market (from a range of private equity and private debt strategies to real estate, infrastructure, commodities and niche assets) all with different risk/return profiles and typical hold periods to choose from.

  • Superior returns potential - It comes as no surprise that one of the key drivers behind investors increasing their exposure to private markets is the high returns it can deliver. Data from the BVCA show that private equity and venture capital, for example, consistently outperform the FTSE 100 and FTSE All-Share Index over both short and longer time periods[5].

Investors expect to benefit from the ‘illiquidity premium’ attached to locking their capital up for longer. Since, unlike public markets where shares are easily tradeable, private market shares cannot be bought and sold instantly, therefore illiquid investment opportunities tend to target higher returns to compensate.

  • Flexibility and control – Private investments offer both investors and companies greater scope to decide how the business is run and how investment decisions are made.

One reason why private equity investors are more likely to reap outsize rewards is due to fund managers’ and direct investors’ value creation mindset and the approach they take to ensure that an investee company realises its potential. Typically, they will actively engage with portfolio businesses to a greater or lesser extent to unlock enhanced investment returns.

At one end of the scale, investors may provide the business with strategic advice based on their own expertise and seek to influence decision-making. They might take a seat on the board and/or introduce leadership to their own networks of influential expert contacts.

At the other end, some businesses benefit from full-scale transformational investing, which involves complex strategies to yield higher returns through specialist active management, e.g. via implementing turnaround strategies or participating in complex carve-out deals.

In addition to being able to access all this expert support, there are companies that are better able to flourish outside of public ownership, without all the restrictions and rigid requirements that a stock market listing entails.

  • A longer-term approach – Moreover, the extended investment horizons typical with private market investing also have advantages on both sides. Public markets are known for their short-term focus, where quarterly reporting pressures loom large, prompting some businesses to chase near-term goals at the expense of strategy over time. Also, their potential for volatile performance and easy liquidity carry the risk of investors all rushing to sell their stakes at once if they get spooked.

In private markets, investors and the companies they invest in can take a longer-term view. Investors are more committed and business decision-making can be more considered. In this way investment strategies can be closely aligned with the growth trajectory of the company.

With some $11.7 trillion of assets under management (AUM) according to McKinsey[6], private markets are now a key feature of the investment landscape, and one that only looks set to expand further. Given that data provider Preqin forecasts the size of private markets will grow at a compound annual growth rate of 11.9% in the next five years[7] as more and more businesses and investors look out for good opportunities, its role in powering economic growth and portfolio value is clearer than ever. When it comes to considering investing in public or private markets, it makes sense to make room for both.