The evolution of private markets
The road ahead in a competitive landscape
Private markets now play a key role in institutional portfolios and as vital sources of equity and debt financing for companies, real estate and infrastructure. Yet investors still face hurdles in putting private assets to work—problems of access, integration, risk measurement and investment structure. The way forward is for investors to lean into the evolution of private markets, seeking out innovation and sharpening their focus on desired outcomes.
Focus on outcomes
The need of investors for return, income and diversification brought private assets to their current prominence. To target these goals most effectively, investors need to move from a narrow focus on individual asset classes to a broader perspective that compares private assets on the basis of their risk-return and cash-flow characteristics, and their alignment with desired outcomes.
Embrace innovation
Innovation means refining strategies and investment vehicles at the sector level while also looking across sectors and thinking in terms of overall portfolio construction. By working to expand opportunity sets and align investments with desired outcomes, we believe investors and managers can help private market investing realize its full potential.
Opportunities Amplified
Areas of focus arising out of the current environment
Recent market volatility and the persistent low rate environment have led investors to pursue tactical opportunities that have been enhanced by the market dislocation.
• Alternative assets are a significant element of the capital markets, allowing investors to have exposures to targeted elements of the post-COVID economy, with differing levels of risk and reward depending on investor preferences.
• Alternatives allow investors to take advantage of long-term, mega trends, including global infrastructure, the energy transition and technological change, all of which are potentially accelerated in the crisis.
ESG’s arrival into the mainstream is unambiguous
1. Resilience during global pandemic
• Across asset classes ESG strategies have outperformed broader markets.
• Companies with strong ESG credentials have outperformed broader market benchmarks year to date.
• Returns on private markets renewables have proven to be very resilient during COVID.
2. Client increasingly looking to allocate to sustainable strategies
• Sustainability is creating structural shifts and compelling investment opportunities across many industries e.g. energy transition, resource efficiency, financial inclusion.
• Private markets provide a high-quality way to access with hands on portfolio construction, driving value and ESG outcomes via direct ownership and long-term hold.
• Pivotal growth in sustainable flows during COVID, 2 evidencing long term rather than short term trend.
3. Climate change awareness is shaping the industry
• Climate risks becoming increasing apparent, corporates are setting net zero commitments, investment increasingly acting, green recovery has been a key element of COVID recovery plans.
4. The rise of the S in ESG
• Social factors have become key drivers of investment performance both in relation to crisis management and the recovery from COVID (e.g. employee engagement, supply chain, customer management, health, and wellness for Real Estate).
5. Regulation driving adoption
• There is a regulatory push around the globe putting ESG at the center of new investment opportunities given the growing recognition of ESG issues in financial risk management. Immediate focus is on disclosure.
