What is the Future of Private Markets

Over recent years the rise of private equity has mushroomed. This trend shows no signs of decline with the future of private markets predicted to grow. However, it is also forecasted that there will be changes as well as challenges ahead.

This means that founders, entrepreneurs, business executives, and investors from all walks of life need to keep their fingers firmly on the private market pulse.

To help you understand the true potential of this rapidly growing sector let’s take a look at the future of private markets and start with….

Why Should you Consider Investing in Private Markets?

As will be seen later in the piece, choosing the right private companies to invest in can reap rewards. This is seen through the fact that historically investors in private markets funds have been rewarded through the outperformance over public markets.

For decades now many of the most sophisticated institutional investors across the globe have been including allocations to private markets in their portfolios. The reason for this is that there is a contrast to investing in public markets.

Public markets tend to focus on potential future insights into a company, asset, or market segment whereas private fund managers work actively with management teams to increase their investment(s) value and create healthy returns.

On top of those targeted higher returns an allocation to private markets generally helps to reduce the overall volatility of a portfolio.

It is also seen that valuations in private markets are more reflective of a company’s actual earnings. This means they are not as vulnerable to public market investor opinion which can significantly impact the share prices of public market investments.

In consequence, investors in private markets can reduce portfolio volatility while also increasing portfolio diversification through investing in private markets.

Due to the long-term investment periods as well as the illiquid nature of investing in private markets, this has traditionally been the realm of institutional investors. However, the investment landscape is changing.

This is through such things as the easing of regulations and the development of various private markets funds offering a certain amount of liquidity. These changes and differing investment approaches now mean that private investment opportunities are available to a far wider group of current and would-be individual investors.

What is Behind the Rising Activity in Private Markets?

There are many contributing factors behind the rising activity in private markets. To pinpoint some key reasons, here are five to understand:

• There has been a new era of higher inflation and this is coupled with rates and volatility that have disturbed public markets. The result has seen the creation of growth opportunities across private markets.
• The makeup of portfolios to include private assets is becoming more needful than ever. This is because many investors are now uniquely poised to take the best advantage of notable and significantly important global trends.
• While there has been a retreat of public financing, private credit has continued to expand to meet the increasing needs of companies seeking capital.
• The increasing infrastructure being built is expected to benefit from continued investment in relation to sustainable energy and financial security solutions. This is also touted as playing a role as a non-correlated inflation hedge.
• After record valuations in private equity, it is expected that lower valuations will be seen and that there will be an increase in buyout, carveout, and M&A (Merger and Acquisition) activity. The expected results should lead to a higher number of quality portfolios for sale in secondary markets.

Five Significant Benefits of Private Market Investment

Investing in private markets is set to increase in demand. They have already proven their ability to give investors portfolio diversification by lowering volatility effects while generating superior returns. Investors are seeing calculated and informed private market investments providing them with attractive recurring returns and capital gains.

For these reasons alone it is clear why they are in such demand. Add to that their capacity to show further unabated growth. This is despite the global uncertainty surrounding the world’s economic and financial environments.

Informed investors see significant benefits of private markets through the fact that a wide range of documented studies shows superior private market returns when compared with public market returns. Five significant factors for this are:

• The incentives for managers are more closely aligned with investors’ interests.
• Private markets offer broader investment scope than public markets.
• Company acquisition opportunities are secured at lower market values.
• Illiquidity premiums can be seen as a key factor. I.e. This relates to the increased returns an investor can expect to earn for capital commitment over medium-to-long-term investment cycles. 
• Private markets offer investors long-term strategic orientation.

Are Opportunities Limited to a Specific Global Region?

The clear answer here is a resounding ‘NO!’

The constantly evolving private market investment scene is now a global phenomenon, one that will continue to develop. This is particularly the case for venture capital, growth capital, infrastructure, and private debt.

To highlight the global nature and opportunities for private market investors today consider these two facts:

• Asia accounts for more than double the amount of growth capital as North America.
• In terms of venture capital, this is currently around the same amount. This shows there is real potential for future growth.

What About Accessibility?

Due to the rising interest in private market investing, valuations are being stretched in some segments. However, relative to institutional investors and family offices, private markets continue to be under-allocated in individual investor portfolios.

While this is felt to be mainly due to certain deals only being available to institutional investors this landscape is and will continue to significantly change. The result is greater access for individual investors.

There are Some Serious Investor Opportunities

The investment community is well aware that near-term uncertainty presents an opportunity to achieve long-term objectives. Forecasts on the future of private markets indicate that there are some serious investor opportunities to take advantage of.

To benefit from such opportunities investors will need to analyze and begin (or continue) to invest in durable global trends. Just some examples are:

• The continued expansion of technology adoption for social needs.
• Companies involved in the transition to a low-carbon economy.
• Ventures in the health-tech arena who are involved in such areas as AI (Artificial Intelligence, Data Analytics, and Personalized Preventative Healthcare).
• The consistent emergence of demographic shifts.

From a portfolio view, the correlation between stocks and bonds has changed fundamentally. This means that investors' portfolio construction processes also need to evolve.

Experienced investors will be aware that during the ‘Great Moderation’ (the name given to the period of decreased macroeconomic volatility experienced in the United States from the mid-1980s to the financial crisis in 2007) the private markets' narrative focused on yield premiums based on a low-rate world.

From those experiences and the need to look forward, it is felt that the focus should now encompass the active as well as the additive nature of private markets. This focus needs to be based on asset selection strength and futures that can show resilience through economic cycles. Considerations also need to be made relating to protections that come in the form of investment structuring.

This is where knowledge, foresight, and experienced advice are necessary. Investors need to be conscious that the investment period of a new fund vintage is a long-term commitment. One that does not show short-term gains but is intended to produce some very healthy results over years. With that in mind, the prospect of lower entry valuations should now be seen as an attractive quality.

Private Equity Investors Should Seize the Opportunity

In the investment world, volatility creates opportunity and it is acknowledged that the opportunities private equity investors have right now will be hard to better.

Given the current circumstances, it is forecast that the next 12-18 months should be all about patient capital investment and selectivity to give buyers the opportunity to capitalize on the expected changes caused by market dynamics.

Historically private equity has demonstrated superior risk-adjusted performance when set against other equity strategies. It is also the case that private equity tends to outperform public equity by a greater alpha during these periods of distress.

This means that beyond the potential benefits to be gained from diversification and decreased volatility, private equity investors should be aware that the best vintages often follow a recession.

How to Build a Healthy Private Market Portfolio…

While the future of investing in private markets looks to have a healthy outlook a scattergun approach is not recommended. With that in mind, WOWS Global is ready to assist you when it comes to making investment decisions that are right for your individual needs.

The importance of building and maintaining a well-diversified private market portfolio cannot be underestimated. This involves a dynamic process and requires specialized technical knowledge as well as investment expertise. You then need to couple that with strong legal, compliance, structuring, and accounting skills. WOWS is very well placed to offer a fully realized investor solution.

Our mission is two-fold. We are supporting smart startup founders in every step of their journey and offer investors professional and experienced industry insight.

Any investor looking to establish a diverse portfolio, one that includes exclusive private market investment opportunities that will help their returns grow, will benefit from talking to our highly qualified management team.

WOWS has built a state-of-the-art, secure, online ecosystem that allows founders and investors easy, 24/7 access to the key details they need. Among many other strands of the services offered we major in the discipline of due diligence. The tools and industry-proven methods at your disposal give transparency to both startups and investors.

We have extensive industry experience that is backed up by a fully qualified team to offer advice, support, and insight. Just as importantly, WOWS also prides itself on the ability to match like-minded investors and founders to ensure long-term relationships prosper.

Any investor that would like to understand more about the comprehensive services WOWS offer is invited to contact us for an initial no-obligation discussion at:

contact@wowsglobal.com