Investors are increasingly attracted to private markets. Why?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Pavel Ermoline, Investment Director , Moonfare, Blazej Kupec, Senior Content Manager, Moonfare

Access to private markets – investment in equity or debt not traded on public exchanges – is broadening to include individuals in addition to institutions and the ultra-wealthy. So it’s worth understanding what this growing group of investors finds compelling – and challenging – about this asset class, characterized by relative illiquidity, as well as potentially higher returns compared to public equities. Private markets can indeed be more opaque and less accessible than public markets, often including long lock-up periods for investment.

Exploring this shift is even more pertinent given the meteoric growth of private markets in recent years. Over the last decade, assets under management (AUM) have more than tripled to $11.8 trillion in 2023. This upward trajectory is set to continue, with analysts at Preqin predicting AUMs to surpass $18.3 trillion by 2027.

Historically, investing in private assets has principally been the domain of pension funds, endowments and other large institutional investors. These players have the resources to navigate the challenges of relatively high minimums and long holding periods, often spanning a decade.

Meanwhile, the landscape is fast evolving. Regulatory and technological advancements are opening private markets to a much broader group of people. Individuals now find themselves on a more level playing field with major investors like sovereign wealth funds as they seek potentially higher returns and diversification benefits.

While individual investors in many countries still need to meet certain professionalization requirements, these barriers are lowering by the day. A recent revamp of the European Long-Term Investment Fund framework, for example, could open private markets – with some caveats – to everyday investors.

There are a handful of digital platforms enabling this shift towards the “retailization” of private markets. Berlin-based Moonfare, for instance, has so far empowered more than 3,800 people from around the world to access a wide array of alternative investment opportunities, including private equity, venture capital and secondaries.

But with the current economic volatility, how do these investors view private markets? And what specific opportunities do they find particularly attractive? Our third annual Investor Survey, carried out in September 2023, was designed to answer these questions. Here are the key highlights:

1. Focus on diversification

Diversification has emerged as a key theme during the past 18 months. In the face of rising rates and inflation, 46% of survey respondents said mixing investments has landed high on their agenda, followed closely by increasing cash reserves and becoming a more active investor (see Figure 1 below). This trend highlights investors’ efforts to not only protect their current portfolios, but also to strategically position them for future growth.

Investors are using diversification to ensure future growth.

The survey also found that many investor survey participants are already well exposed to private markets. Roughly 26% of respondents have dedicated between 21% to 50% of their portfolio to these assets, in addition to around 35% with a 11% to 20% share (see Figure 2). This level of investment is comparable to pension funds, endowments and foundations.

Individual investors are increasingly exposed to private markets.

2. Buyouts remain popular, while defensive strategies have gained in favour

The survey captured a growing appetite for private markets as 88% of respondents have indicated new allocations in the next 12 months, up six percentage points compared to last year (see Figure 3). But what specific strategies are they considering?

The new appetite for private markets shows no signs of abating.

Traditional private market strategies like buyouts, venture capital and growth equity remain popular for their diversification potential and access to established fund managers with track records of achieving attractive risk-adjusted returns.

Buyouts, for instance, continue to be the preferred option. The survey found that 83% of respondents own stakes in these investments, a 16 percentage point increase compared with 2022 (see Figure 4).

Buyouts are the most popular strategy.

However, 2023 has also seen a growing inclination towards income-oriented strategies like infrastructure and private credit. These assets are particularly appealing in an environment of high interest rates and inflation that typically weigh on traditional investments.

Infrastructure could be a particularly attractive addition to a mature, diversified portfolio by offering potential hedges against inflation and volatility. Infrastructure is often a long-term investment that can maintain value throughout economic cycles and can be low-risk and low-return. While last year only 15% of respondents reported holding a stake in private infrastructure assets, in 2023 this share has grown to almost a quarter.

Many are also now exploring the secondaries space, involving funds that buy already existing stakes in underlying portfolio companies, usually at a discount. Almost 42% of the survey respondents report owning interests in secondaries funds, a notable 10 percentage points increase compared to last year’s survey.

Though secondaries have a lower return potential than primary investments, they may provide immediate diversification through older vintages, sometimes including hundreds of underlying companies.

3. The economic outlook remains gloomy

While many investors taking part in the survey may have a bullish sentiment for private markets, this stands in stark contrast with their much more pessimistic outlook for the global economy. Indeed, the survey found that 46% of respondents have a “bad feeling” about economic conditions, with only 16% feeling optimistic (see Figure 5). These results are still an improvement compared to last year, which was dominated by recessionary concerns and ongoing interest-rate hikes.

The global economy continues to cause investor disquiet.

At the same time, survey participants are cautious about the short-term economic outlook, with half expecting the current situation to last another one to two years, while 28% are more hopeful, anticipating a downturn lasting six to 12 months before a rebound.

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With the turning of economic cycles, the survey shows how many investors are taking action, rethinking priorities and deploying capital in opportune investments, suited to the new economic reality. Private markets will have an increasingly visible role in this process, bringing people opportunities that can offer true diversification while retaining the upside potential.

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