Historically, private markets investments have outperformed their public markets equivalents. This outperformance is partly driven by the theoretical concept of the illiquidity premium – that investors should receive a higher return on capital in compensation for the illiquidity risk of the investment – though the ability of private equity funds to exercise control over a company and implement value creation strategies is also a factor.
Source: Cambridge Associates, performance as of 30 June 2019. Private Equity performance is the pooled IRR, net of fees, of all private equity funds included in the Cambridge Associates index. Public Equity reflects the Cambridge Associates modified public market equivalent performance of the MSCI World All Country Index.
Source: BlackRock 2019 Global Institutional Rebalancing Survey.
Favoured by institutional investors
Institutional investors have been increasing their allocations to private markets, whilst decreasing their allocations to their public markets equivalents.
In response to a BlackRock survey of institutional investors, 51% said they were decreasing their public equity allocations with almost the same number of investors – 47% – increasing their private equity allocations.
There are a broad range of strategy types within Private Markets, each with its own unique risk and return characteristics.
Private Equity – Private equity funds seek to generate capital growth for their investors from buying established companies, improving them, before selling to strategic buyers or floating on the stock market.
Private Debt – Private Debt funds do what banks used to do before the financial crisis; lending to high quality businesses. Investors look to Private Debt funds to earn more attractive yields than available from liquid bonds.
Venture Capital – Venture Capital funds seek to identify the most promising emerging businesses and provide them with the capital they need to realise their potential
Private Markets strategies differ along a number of key factors including the type of return targeted (i.e. capital growth or income), cash flow profile, and typical target returns.
Note that target returns are for illustrative purposes only. Performance is not guaranteed, and will vary significantly by fund. Past performance is not indicative of future returns.