Increasing capital flows into private markets have led to a rapid growth in assets under management of private markets and broadened the investor base within this segment, according to a new report by Investcorp.
Private markets benefitted from increasing inflows last year after traditional asset classes were beset with challenges such as historic lows in fixed income yields and a volatile equities market, the Bahrain-based asset manager said.
“The resilience of private markets’ performance during the volatility and uncertainty that defined the past 18 months, supports robust investor allocations to these asset classes," said Richard Kramer, head of risk management at Investcorp.
"However, constructing a portfolio of private market investments is just as great an opportunity as it is a challenge, and yielding a substantial return from the market requires careful consideration of the value proposition and prevailing macro environment.”
Investors have increasingly allocated funds over the past year to private market investments such as private equity, private debt, real estate, absolute return, infrastructure and general partner stakes as the pandemic caused massive volatility in traditional markets.
Private equity outpaced other asset classes in terms of the higher returns on offer in a sustained low-yield environment, according to a report by McKinsey.
"The most in-depth research continues to affirm that, by nearly any measure, private equity outperforms public market equivalents (with net global returns of over 14 per cent)," the report said.
However, the disruption caused by the global pandemic meant the amount of funds raised by the industry declined 22 per cent last year, to $503 billion, according to McKinsey.
Private markets had enjoyed healthy growth before the pandemic, growing by a factor of five between 2003 and 2019, Investcorp said in its white paper, citing figures from BCG Asset Management. Private markets grew at a rate of about 11 per cent a year to $15 trillion in 2019, while public markets' growth over the same period was slower at 6 per cent, to $74tn.
Investor appetite for private markets assets has been influenced by factors such as active management approaches and longer investment periods that offer the ability to navigate short-term pressures that can distort investment decisions in public markets, the company said.
Factors such as excess returns, diversification benefits, improved risk-return profiles and exposure to societal megatrends such as ageing populations, environmental and social governance standards, artificial intelligence and climate change have also led investors to tap private markets, it added.
"The rationale for allocation to private markets remains compelling, generating differentiated sources of return for investors," Timothy Mattar, global head of distribution at Investcorp, said.
"As private markets mature further, we expect to see product designs and structures evolve to cater to changing investor appetites and capitalise on new investment opportunities.”
