Why include non-listed assets in a global allocation?
As a complement to public equity, private markets have evolved significantly in recent decades and their popularity continues to grow.
What are private markets?
|The private assets market currently represents almost $10 trillion1. This asset class can be broken down into four main categories. It includes:|
|The diversity of the underlying strategies means that we can build diversified allocations that complement investments in liquid assets.|
How can one access this asset class?
Most of these assets are difficult to access. This is a market that is mainly aimed at institutional investors, with entry tickets that can be extremely high (minimum of €5 million to €15 million). The complexity and illiquidity of these products further restricts access. It is against this backdrop that we support our clients in their unlisted investments by identifying opportunities and providing more appropriate access for private investors.
Why include unlisted assets in an overall allocation?
Firstly, for diversification purposes, as they provide access to companies that are not present on traditional liquid markets. As an example, the number of unlisted companies in the US is 200,000 with revenues between $10m and $1b.2
It also has the characteristic of offering higher average returns than liquid assets, in particular to compensate for their lower liquidity. It is important to bear in mind that these are long-term investments, with funds investing in an unlisted company taking a stake for a holding period of 3 to 5 years, depending on the underlying value-creation strategies. This period allows the fund manager to deploy the value-creation strategy envisaged for the asset.
Secondly, unlisted assets are valued on a quarterly or even half-yearly basis. As a result, they are less volatile than investments valued on a daily basis. At the same time, and again with a view to reducing risk, by diversifying entry points and management companies we will optimise the resistance of investments to market events and economic crises. For each fund, the entry points are also smoothed out, as the funds invest and build their portfolios gradually. This is all the more important in the current context of high valuations. Acquisitions are made over a period of 3 to 5 years, smoothing out cyclical effects.
Another point of interest is the involvement of all stakeholders. Whether it's the investment teams (who invest on a personal basis), the management teams (who are financially exposed to the company's value creation) or the companies, all the players are rewarded for their performance. There is a very strong alignment of interests, characteristic of this asset class.
Lastly, this is an industry that took environmental, societal and governance criteria into consideration very early on. In real estate, for example, we find strategies dedicated to sustainable buildings and renovation work; within infrastructure assets there are also investment strategies based on financing renewable energy production facilities.
How is the market evolving today?
In 2022, private market fundraising totalled more than $1.3 trillion3.
This is a second all-time high, and a slight decrease of 10% compared with 2021, a record year for fundraising.
Against a backdrop of economic uncertainty, investors are looking for large, experienced players with a proven track record. They also prefer funds with large, dedicated teams (obtaining financing, developing assets, etc.) that can provide real added-value to the assets in the portfolio.
In terms of strategies, private equity remains largely dominant, but the current context of high inflation and rising interest rates is prompting investors to turn to new strategies. These include direct lending and unlisted infrastructure, with a low correlation to financial markets and indexed to inflation. This uncertain environment is also prompting investors to secure their unrealised capital gains and reduce their level of risk, a trend that is beneficial to the secondary market.
 McKinsey report: Global Private Markets Review 2022
 Year-End 2022 Middle Market Indicator
 Bain report: Global Private Equity Report 2023