Private capital markets have been outperforming equities, offering investors opportunities with higher yields and portfolio diversification. 

In brief

  • An estimated US$22.6 trillion of capital is invested in private markets – a figure expected to continue rising despite recent headwinds.
  • Market growth has been driven by an increase in high-net-worth individuals (HNWIs), intergenerational wealth transfer, and companies staying or going private.
  • Private capital has shown great resilience in a volatile environment and presents tremendous opportunities for investors and entrepreneurs globally.

In volatile times, investors seek growth and resilience, qualities that private capital markets have demonstrated in abundance in recent years. Made up of family offices, private equity (PE), hedge funds, venture capital (VC) and private debt, private capital provides a compelling alternative to public markets.

With the transfer of intergenerational wealth, a global trend towards delistings, and companies opting to stay private for longer, there are strong indications that private capital markets are set to rise further. This article looks at some of the key drivers of growth, and the prospects for this sector, touching on issues like performance, resilience, access to capital, and investment preferences.

The rise and rise of private capital

Sustained growth and strong fundamentals

In the past decade, private markets have enjoyed a remarkable period of sustained growth, more than doubling from US$9.7 trillion in assets under management (AUM) in 2012, and are estimated to have reached $22.6 trillion AUM by the end of 2022.

Several factors have driven this trend, including investors’ search for higher yields, increasing numbers of HNWIs with more investable wealth, and the largest intergenerational transfer of wealth in history.2 As private capital markets have become larger and more liquid, many successful companies have chosen to stay, or go, private. For many larger private companies, the option of staying private has also become more appealing. This is partly due to the reassurance of higher regulation standards in private company governance models. However, conditions in the public market have also played a part. These include increasing costs, and the daily, quarterly and annual public market disclosure requirements, which discourage companies from going and staying public.

The 10-year picture also reveals that the performance of private markets has been consistently stronger and less volatile than that of public markets, especially since 2016.

Across the globe, the number of delistings has shown a steady upward trend since 2012, with a particularly steep rise in the Americas and APAC. Even in EMEIA, where the volume of de-listings has fallen, this has been counterbalanced by a decline in IPOs, which significantly reduced the total number of listed companies. In the Americas, the number has barely changed since the start of the century, while many more large businesses have opted to go (or stay) private. In EMEIA, there are now 40% fewer publicly listed companies than in 2002. These broad trends demonstrate the rapid tilt towards private capital markets, where more diverse growth opportunities now exist across sectors.

Of the various subsectors within the private capital market, venture capital (VC) has seen the largest annual growth since 2012. The US, for example, saw two record years in a row for venture investment in 2021-2022, where VC funds deployed US$336.9 billion and $212.2 billion respectively. Macroeconomic uncertainty and recession concerns have slowed VC investment in 2023, particularly in the US, but a high volume of fund formation and capital raised in recent years means investors have significant capital to invest, albeit more selectively.

Areas such as generative artificial intelligence (AI) are providing strong interest from investors in 2023, despite a more challenging external environment. This positive investment sentiment on generative AI is matched by the leaders of private companies: The latest EY CEO Outlook Pulse (July 2023) has revealed that approximately two-thirds (62%) of private company CEOs believe AI will be a force for good and drive business efficiency.

Beyond venture capital, PE firms are also well positioned to thrive, with close to US$1.2 trillion in capital at their disposal.  Their diversified portfolios, which include new asset classes, and deep sector and functional expertise also provides advantageous positioning.

Family offices continue to play an important role in the rise of private markets, and with a 27% share are the largest subsector, totalling US$6.1 trillion in AUM.  In the decade between 2012 and 2022, family office AUM grew by an annual average of 7.5% – a figure expected to rise significantly up to 2027.

Resilience in the face of volatility

All markets suffered the effects of a slowing global economy, high inflation and increased uncertainty in 2022. However, private markets proved remarkably resilient to these challenges, falling by just 3.5%. Global equities, on the other hand, experienced a double-digit drop in value, with both developed and developing markets undergoing sell-offs. Even traditional go-to assets in troubled times, such as US Treasuries, suffered, while alternative assets like cryptocurrency fell sharply.

 

 

Underlying private market dynamics remain robust, bolstered by favorable trends such as heightened capital allocation from institutional funds and a trend of companies choosing extended periods of private status. Additionally, a substantial pool of untapped resources, amounting to approximately US$3.2 trillion (excluding hedge funds and family office capital), represents untapped potential. This considerable pool of investable capital holds the promise of substantial growth and the generation of significant returns.

Following a subdued commencement in 2023, private equity (PE) activity gained momentum in the first quarter, fueled by substantial take-privates amid declining public market valuations, resulting in over US$62 billion in PE deals announced in March. Take-privates constituted approximately 80% of all PE deals during the first quarter, a notable departure from the traditional one-fifth ratio. Bridget Walsh, EY Global Private Equity Leader, highlights PE firms’ disciplined approach, seizing opportunities to invest in temporarily undervalued high-quality assets. As we progress into the latter half of 2023, signs indicate a resurgence in PE activity and interest, coinciding with accelerated price discovery. With traditional financing sources facing constraints, private credit emerges as an alternative funding avenue for PE deals, facilitated through actively managed capital pools predominantly investing in loans to private companies. The swift ascent of take-private PE deals underscores PE firms’ acumen in identifying and investing in top-tier assets perceived as momentarily mispriced.