Findings of a study by CoreData reveal a significant shift of focus from public to private markets. Report by Harriet O’Brien.
Global market research company CoreData polled 130 European fund selectors in a recent survey about attitudes to private markets – effectively that eco-system of investments made in assets not traded on a public exchange or stock market.
It found that nearly a third of respondents are switching their investment focus from public to private markets and that 31 per cent think that private markets will outperform public markets.
More than half the survey’s respondents (51 per cent) say low bond yields and rising inflation are compelling their organisation to look for opportunities in private debt.
The report also cites an expanding set of opportunities in private markets as fewer companies go public or opt to delay IPOs. Reasons for companies staying private for longer include avoiding the compliance and regulatory costs of listing, evading the shareholder scrutiny that public firms face and maintaining control over operations.
Founder and principal of CoreData, Andrew Inwood, comments that the study shows how “private markets are fast becoming central to investment strategies as they move from the alternative to the mainstream.”
He adds that: “While private markets offer the prospect of superior, uncorrelated returns, they also present a broader opportunity set by tapping into structural trends at the forefront of economic and sustainable change.”
Sustainability is a big driver. Investors are not only turning to private markets to get superior returns, they are also seeking greener returns. Nearly four in 10 fund selectors in the survey believe private markets will be instrumental in achieving net zero carbon emissions. Meanwhile 55 per cent of respondents say their organisation plans to increase investment in renewable energy infrastructure over the next five years. A similar proportion (53 per cent) thinks the role of real assets in the energy transition creates an unprecedented investment opportunity.
The survey also shows that expertise is considered crucial; it is the most sought-after asset manager attribute for those wanting to invest in private markets. Nearly eight in 10 (79 per cent) of the fund selectors say a high level of internal expertise and resources is important when selecting an asset manager. A long track record managing private assets is the next most-valued manager capability (75 per cent), followed by outperformance over recent years (68 per cent) and the ability to embed ESG criteria into the private asset investment process (54 per cent).
But there could be a downside. Looking into the future, 36 per cent of the fund selectors CoreData polled think that private markets will be subject to tighter regulation and that will dent their appeal. In addition, the report suggests that as private markets evolve from niche to mainstream, they may lose some of their edge in providing new and alternative opportunities so that inevitably the investment dynamic will alter. Some fund selectors expressed concern that the growing demand for private market investments may lead to an imbalance, with too many investors chasing too few assets.