Private markets are overtaking public markets in financing the real economy and this role reversal is set to fundamentally reshape the private markets industry in the future, according to Steffen Meister, executive chairman of the board at Partners Group.
Meister said: 'Private markets have been on an evolutionary journey in recent decades and the industry is increasingly taking over from public markets as the stewards of the real economy.'
The research notes that the corporate IPO, once the sign of a mature business coming to market, is now more often the preserve of young and unprofitable businesses that may not prove successful.
For example, the proportion of listed companies in the US with positive earnings at the time of IPO fell from 85% in 1990 to 21% last year.
Meanwhile, private markets, once known as a venue for opportunism and financial engineering, have increasingly turned to financing healthy businesses and creating value through organic growth and operational excellence.
Partners Group is a private markets firm which has invested over $195 billion in private equity, private real estate, private debt, and private infrastructure on behalf of clients since 1996.
Active investment trends
The rising significance of private markets in financing the real economy, with annual global fundraising now significantly outpacing equity issuance in public markets, will likely attract new entrants to the industry and drive an equally important change among firms themselves, the research claims.
Active and passive investment are familiar terms in public markets and a similar distinction will be key to the differentiation between private markets firms in the future, albeit with a different definition of active and passive.
Truly active private markets firms, which combine scale of resources with an industrial- style transformational investing approach to creating value, will be best-positioned to deliver sustainable outperformance.
The white paper explains that in an increasingly challenging and competitive business environment, where constant transformation will be required for companies to keep pace with change and opportunity, active private markets firms will need to more closely resemble industrial groups than financial services businesses.
It shares five lessons that active private markets firms can learn from successful conglomerates, whilst studiously avoiding their pitfalls.
The paper also looks at what the new landscape of private markets means for asset allocation and the evolution of regulation.
Investors seeking to align their investment portfolio to the foundations of the future economy must increasingly consider that private markets provide the best access to many real economy assets.
Meanwhile, regulation will adapt as private and retail investors take a greater interest in private markets.
Meister added: 'We are seeing rapid growth and disruption across global giga themes such as digitisation, decarbonisation, and ‘new living’ driven consumer habits, as well as accelerating technological advances.
'Against this backdrop, modern private markets firms will need to be strategically agile and entrepreneurial to lead their portfolio assets to success and build our future sustainable economy. Offense will be the new defense.'
