Outlook for private markets: A new era for private debt and infrastructure
Head of Private Markets at Generali Investments Partners
Private markets remain set for long-term growth
As of 2023, the private markets industry faces some challenging macroeconomic conditions. Higher interest rates, recession concerns, inflation, and tightening financial conditions are raising questions about the risks and durability of momentum in the industry. Short-term headwinds naturally arise when such a rapid increasein interest rates occurs, leading to market dislocations as recently seen in the case of the SVB and Credit Suisse banking failures.
However, it is expected that once private markets adjust to this uncertainty, growth will resume. Morgan Stanley projects the industry to grow from $10 trillion to $17 trillion in AUM over the next five to six years, which is a compound annual growth rate of 12%. One key contributing factor to this is the industry’s ability to attract highly talented young professionals who are eager to transform and innovate in private markets,be it private equity, private debt, or infrastructure. This ability to attract young and motivated professionals is crucial to the long-term success of the industry.
An important point for investors to note is that adjustments in private markets generally lag the public markets, with private debt typically repricing a little faster than private equity. So, in the short term, rapid repricing can impact the momentum of private markets growth. The key issue is always the extent to which institutional investors can tolerate illiquidity. Institutional investors have a limit to how much illiquidity they can tolerate, which changes over time and institution by institution. However, the illiquidity premiumthat comes with investing in private markets remains a key benefit. This illiquidity premiumwas temporarily compressed but has since re-emerged. As such, privatemarkets are expected to remain attractive for the foreseeable future.
This secular growth thesis is underpinned by the increase to privatemarket allocations across the entire spectrum of investor types, including sovereign wealth funds with a projected 21% by 2025, up from 19% in 2020. This is driven by the intrinsic characteristics of real assets and private markets, such as the opportunity for portfolio diversification due to a low correlation with liquid markets and a good degree of inflation hedging and value reserving. In the specific case of sovereign wealth funds, accessibility is key: investing in private markets enables sovereign wealth funds to access a range of sectors and geographies that they would otherwise be unable to unlock.
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Source: Generali Investments Holding S.p.A., data as of Q4 2022. Please note the data include Generali Investments Partners S.p.A. Società di gestione del risparmio, Generali Real Estate S.p.A. Società di gestione del risparmio, Infranity which are part of Generali Investments Platform. 1 Investments bear risks. You may not recover all of your initial investment. Investment may lead to a financial loss as no guarantee on the capital is in place. 2 This communication does not relate to these funds which may not be available for distribution in your country. 3 This communication does not relate to this fund which may not be available for distribution in your country. 4 Investments bear risks. You may not recover all of your initial investment. Investment may lead to a financial loss as no guarantee on the capital is in place.
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