The proportion of money coming into private markets from non traditional investors and fundraising is set to jump dramatically in the next few years, our latest research shows.
A third (33 percent) of investment institutions believe that “retail fund like vehicles” will make up around half of flows into private markets assets within the next two-to-three years, while 14 percent think the majority of investment will come this way over the same period.
And there were positive expectations for the European Long Term Investment Fund (ELTIF) and UK Long Term Asset Fund (LTAF), both of which two thirds (67 percent) of respondents would be successful.
These figures come from the 2024 State Street Private Markets Study, a survey conducted earlier this year of nearly 500 investment institutions, including mainstream asset managers with private markets divisions, private markets specialist asset managers, non-profit asset owners such as pension funds, and insurance companies with asset management arms investing in private markets.
The overall picture from the research is one of continued growth in private equity, private debt, infrastructure and real estate, despite the fact that economic conditions are more challenging now than they have been over the past decade or so of private assets growth. In effect, private markets growth is a force too powerful for even the strong headwinds of the 2020s.
And, based on the above results, a broadening of the investor base for private assets through the growth of fund vehicles offering more liquid and lower cost investments to defined contribution (DC) funds and higher net worth retail investors, is crucial to this development of the market.
But, if private assets are going to increasingly reach more investors of the type that have traditionally invested in listed ones, they will also have to start being managed more like the assets those investors are used to, with all the implications for data and transparency that implies.
Our respondents recognise this. A large majority (79 percent) felt an ability to access portfolio level data on their private markets holdings that was sufficiently timely and accurate to be incorporated onto the same platform as their public portfolio data would be valuable as their private portfolios grow – around quarter (26 percent) said this would be “transformational”.
But there are challenges to achieving this at the operational level. More than half (54 percent) said the accuracy of the data they currently have access to was not good enough to make it happen, while 43 percent said the same of their data’s timeliness. Lack of awareness of technology platforms catering to all asset types was also a problem for many (39 percent).
Furthermore, if individuals like DC pension savers are going to be increasingly brought into private markets, there will also be implications for how governments and regulators scrutinise them.
Already, in the US, the Private Funds Advisors Rule has imposed more onerous disclosure rules on private funds, with effects on the frequency and oversite of managers’ reporting of valuations, performance and financial audits.
This presents another set of compliance challenges for our respondents. Around half (51 percent) said they struggle with frequency and timeliness of valuations and a similar number (47 percent) said the same of the accuracy of their valuations.
Meanwhile, nearly half of general partner respondents admitted their ability to assess the quality of private markets opportunities was not strong, and 39 percent of limited partners said the same of their ability to perform due diligence on managers.
These operational and regulatory issues will have to be faced against an unpromising economic backdrop that most institutions expect to continue for some years.
Although most (61 percent) believe inflation has peaked in their region, fewer than half (47 percent) believe it will come back down to the central bank target in their country or region within the next two years.
And the majority (58 percent) also believe borrowing costs will remain high “for the near to medium future” and this will “continue to negatively affect” their ability to invest in private markets.
So faced with all of these acknowledged difficulties, the planned future growth of these asset classes that our results show must be taken as a vote of confidence in their continued ability to offer alpha, reliable income yields and portfolio diversification.
