By Steve Sokić, Group Head of Private Wealth at IQ-EQ
The numbers speak for themselves. In 2015, the private capital investment industry had total assets under management (AUM) of around $3.5trn, but by the end of 2020, it was estimated that the industry had more than doubled to $7.4trn AUM. Look ahead four years, and this is expected to double again to $13.5trn.
As a trusted long time outsource fiduciary and administration partner to many of the world’s leading private and institutional asset owners and investors, IQ-EQ has had a front row seat to the convergence of both private and institutional players into this private capital space. The numbers and our experience points to the question of what is behind the ‘rise and rise’ of private capital.
We’ve broken this down into five reasons which explain why we believe the only way is up for the private capital industry.
1) ‘Institutionalisation’ & globalisation of private investors
The growth of the private markets has been primarily driven by wealthy private investors and/or their family offices, as well as major institutions and fund managers. Increased globalisation has meant that private investors and family offices have to turn towards more sophisticated institutional-style processes, capabilities and styles of investing as they move their assets around the world with them.
Covid-19 presented a unique challenge for wealthy investors and their family offices as they made competitive changes to the way they are structured and operate. This meant that ultra high net worth (UHNW) families and individuals were paying closer attention to how and where they were structuring their wealth – from enhanced asset preservation and succession techniques to a closer focus of ensuring compliance with relevant regulations and tax standards, all of which are more complex in a cross-border environment. By its nature, most of that work is outsourced to specialists. While there are high levels of such outsourcing in regions such as Europe, this is still growing in the U.S. and Asia with the percent of work outsourced small but growing at a significant pace.
2) Low interest rates
We are living in an extremely low interest rate environment. While there are whispers of rate rises in the future, the Bank of England has held firm in its most recent assessment.
This environment has been a key driver in the growth of the private markets, with low interest rates, coupled with low or negative yielding bonds, encouraging private investors to shift their capital allocation to the private markets as a diversification tactic.
Further to this, low interest rates and financing costs means that alternative/private asset fund managers (GPs) can access capital at a lower cost. This means that they have the unique opportunity to make more affordable investments that will pay off in the future.
3) Public markets are volatile
Amid this atmosphere of low interest rates, public company market valuations are continuing to rise. While the public markets have broadly stabilised from its previous pandemic induced volatility, many consider public companies as still overvalued.
The private markets in comparison were impacted less by Covid-19, which meant that private investors shifted assets across from the public markets in favour of a safer, less volatile options to take advantage of additional alpha and enhance yields.