Private markets stayed strong in 2019. True, fundraising was down 11 percent. But $778 billion of new capital flowed into these Private Markets. Investors have a new motivation to allocate to private markets: exposure. More investors believe that private markets have become effectively required for diversified participation in global growth.
Private markets are going mainstream. Private equity’s net asset value has grown more than sevenfold since 2002, twice as fast as global public equities. And consider the growth in US PE backed companies, which numbered about 4,000 in 2006. By 2017, that figure rose to about 8,000, a 106 percent increase. Meanwhile, US publicly traded firms fell by 16 percent from 5,100 to 4,300 (and by 46 percent since 1996). Even some large investors that had previously stayed away are now allocating to private markets, seeing them as necessary to get diversified exposure to global growth.
The industry reveals rapid development. In its structures and behaviors, a rapidly developing industry now offers many ways for investors to customize their exposure. The secondary’s, long-duration funds, capital call lines of credit, and other structures proliferate, they are making the industry more flexible and accommodating to a range of investors.
2018 is notably different than 2007. PE deal volume in 2018 finally surpassed 2007 highs. Will we look back at 2018 as a repeat of 2007’s peak? Pricing is similar, covenant-light debt has returned, dry powder keeps rising, and every day new players enter. But private markets are twice as large; the average PE deal is smaller and less levered; club deals are no more; fundraising has taken a breather; pacing plans exist; and people know what vintage risk is.
Co-investments has a supply challenge. Demand for PE co-investment vastly outstrips opportunities provided by GPs. The imbalance does more than just frustrate LPs; it keeps their portfolios from gaining the diversification necessary to optimize the risk-return balance of these instruments. Many LPs with one or two positions may be taking more risk than they realize.
Growth in VC brings new questions. PE fundraising was down but venture capital bucked the trend, growing 13 percent year-on-year, and 18 percent annually since 2015. Now, ultra large funds are stretching the definition of the asset class: where does VC end and growth begin? Is a billion-dollar deal really VC, or even growth? Some are putting billions of dollars at one go into rapidly growing but massive companies; meanwhile, industry stalwarts continue to invest entire funds smaller than that. And do most LPs really want to be in VC, given the relative difficulty of accessing the best funds?
Real estate LPs are seeking more discretion. Investment into vehicles in which LPs have more liquidity and more discretion continues to grow. Several large LPs have announced interest in growing “direct” investments, aligning with a long-term trend. Those investors not going direct have increased their discretion over cash flow timing by investing in open-end vehicles, driven in part by a preference for core funds as a substitute for fixed income. In today’s cap-rate environment, core investors face the paradox of not wanting to overpay while also recognizing that core typically outperforms riskier strategies in a contraction, and many are splitting the difference by investing in core-plus mandates, a quickly growing strategy.
Private Markets investing is undergoing some of the biggest changes in its brief history. With growth comes maturity. In 2019, private markets continued to add flexibility, depth, and sophistication. Secondary’s have scaled rapidly and made the asset class easier to access and to exit. REO Capital is a part of that change because we bring several different Private Investment Funds in Private Equity & Venture Capital to various Investors every year. What is interesting is that this market is nearly a $One Trillion Dollar Market annually and yet No one is reporting the developments and changes within these Private Markets? REO Capital welcomes your questions about the Private Markets at – https://www.reocapitalllc.com