Amid Heightened Uncertainty, Private Investments Can Play an Important Role
As we highlighted in our annual Capital Market Assumptions (CMAs), going forward, the evolving economic backdrop presents new challenges for investors. We anticipate long-term economic growth to remain positive, but a fragmented global order is likely to coincide with structurally higher inflation and greater variability in economic performance across countries and regions. In our recent article about US vs. international investing, we discussed how such an environment may require investors to emphasize geographical diversification. Another opportunity is private investments, which can play a role in ensuring that investors avail portfolios to a wider range of opportunities.
Private investments—such as private equity and private credit—can serve as a powerful complement to traditional assets in a broader investment portfolio because they provide exposure to investment opportunities that would otherwise be inaccessible via public markets. These opportunities continue to expand as the size of private markets grew considerably in recent years.
There are a variety of factors that contributed to the expansion of private markets. From an access standpoint, new structures such as evergreen funds alleviated some of the liquidity barriers that previously made it difficult for investors to access private assets. Capital markets also evolved, facilitating access to private capital that makes it easier for companies to remain private. Furthermore, heightened uncertainty and volatility reduced the number of new initial public offerings (IPO’s) each year. To put this into context, in 1980 the median age of a company at its IPO was six years. In 2024, that figure was 10.7 years. Corporate executives are simply choosing to remain private for longer, and this led to a significant increase in the scale of private markets and the need for investors to provide private capital solutions. Today, 90% of companies with revenues in excess of $100 million per year are privately held, suggesting that even passive investors should consider an allocation to private markets to ensure that they have exposure to the entire opportunity set.
Private markets are also an incubator for innovation. In fact, outside of mega cap tech, numerous AI- oriented companies are privately held, and private investments into AI accelerated meaningfully over the past couple of years. Realistically, a majority of these investments will not bear fruit, but it is increasingly clear that investors who seek exposure to the upside potential of AI would be well served to look to private markets as an access point.
The above makes private asset classes an attractive source of diversification and upside potential going forward, but these opportunities are not without risk. Private equity investing faces multiple headwinds, including higher cost of capital due to elevated interest rates, historically high levels of dry powder, and a difficult exit environment. On the credit side, there are early signs of weakening fundamentals as companies are being challenged by higher interest rates. Additionally, the rapid increase in the size of the market led to aggressive fundraising which increased the amount of capital looking for opportunities and could result in a shift of power that benefits borrowers at the expense of lenders (investors).
Investors should also understand that the true risks of private markets are often masked by the lack of daily pricing available. In public markets, an active market allows prices to reflect new information almost immediately, whereas private markets do not have the same type of real-time feedback. This has both positive and negative implications for investors. On one hand, the lack of daily pricing tends to reduce drawdowns and helps investors to maintain a long-term perspective during volatile markets, but it can mask the underlying deterioration that may take place within a company and make it more difficult to understand the true value of an investment.
Summary:
We are of the view that private markets will play an important role in private wealth portfolios going forward. Private investments can provide exposure to opportunities that are becoming increasingly scarce in public markets, but investors need to go in with a long-term perspective and must be willing to sacrifice certain key features of public investing, such as real-time price discovery, low fees, and transparency. Those investors that are able to properly carve out a strategic allocation to private investments should be well positioned to benefit over a multi-decade horizon.
Disclosures:
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is considered to be reliable, Forty W Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. If the reader chooses to rely on the information, it is at reader’s own risk.
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