Private Markets: Keeping Up with Moving Targets | Global Conference 2024

Market Outlook and Structural Trends

• Private market assets under management (AUM) have grown from approximately $3 trillion in 2009 to $13 trillion today, representing a 14% compound annual growth rate (CAGR) over the past decade.
• Despite doubling their share of the global equity market cap in the last decade, private markets still constitute only about 5% of total global wealth.
• Industry participants project the sector could grow from $13 trillion to $26 trillion within the next five to six years.
• Growth is expected to be driven by new client segments including insurance companies, private wealth, sovereign wealth funds, and specific geographies such as Australia and Japan.
• The U.S. has lost roughly half of its public companies since the 1990s, a trend that continues to fuel the shift toward private markets.
• Structural advantages cited include the ability to exercise board control, operate patient capital strategies, and avoid the constraints of quarterly public reporting.
• Private equity has historically generated 300 to 500 basis points in returns above public market benchmarks over periods exceeding 25 years.
• Infrastructure and real estate remain active sectors due to global decarbonization needs, contrasting with the stagnation in the office real estate segment.
• Venture capital and growth equity investments remain frozen, with a "pig in the python" situation requiring years to resolve; late-stage VC has seen no new investment or monetization for seven consecutive quarters.

Fundraising and Market Bifurcation

• The number of funds closed declined by 40% year-over-year in 2023, signaling a shift toward a "tale of the haves and have-nots."
• Large, marquee firms are continuing to execute successful mega-raises, while mid-market firms face increasing difficulty matching the capital raised in previous vintages.
• LPs are becoming highly discerning, prioritizing managers with distinctive competence and proven ability to deploy capital and generate distributions.
• Manager consolidation is accelerating as mid-market firms seek larger platforms for distribution capabilities, talent growth, and operational support.
• Inorganic growth via M&A is constrained by the industry's current state, with M&A activity remaining negligible relative to the total stock of firms, though top-tier firms are actively acquiring platforms to fill voids.
• Successful firms are establishing "vital signs" for capital raising: selling companies at 2–3x invested capital, maintaining capital deployment rates, and expanding investor bases through co-investments.
• The private credit market is seeing a 12% growth in exit volume via continuation funds in 2023, up from 5% in 2019, as this channel has proven more resilient than M&A or IPO exits.
• Secondary funds raised $90 billion in dry powder in 2023, exceeding the $70 billion raised in 2021 and 2022 combined.

Valuation, Risk, and the Credit Environment

• Approximately $3.2 trillion of NAV is held in U.S. alternatives, with 40% of these assets owned for more than four years, creating a potential supply glut.
• The current environment exhibits the lowest level of price discovery seen in both public and private markets, creating a significant bid-ask chasm.
• A correction in the private credit market is anticipated, driven by the inability of middle-market companies to service debt at current 10% coupon rates compared to historical 6% levels.
• Regulatory scrutiny is expected to intensify if market conditions deteriorate, with regulators historically prone to overreacting to crises.
• Credit default data indicates a 20% three-year cumulative default rate for single B-minus issuers, contrasting with the "zero default" narrative currently held by many managers.
• Panelists note that low reported defaults in private credit may be manipulated via waivers and amendments rather than reflecting true asset health.
• The "K-shaped" economy is impacting middle-market companies, with EBITDA down over 30% and interest coverage ratios collapsing to 1x for many borrowers.
• Deal-making activity is currently stalled because buyers cannot achieve target 20% returns given current valuations (14x cash flow) and high debt costs (10–12%).
• The resolution to the transaction logjam is expected to require a combination of tightening credit spreads and a decline in base interest rates, potentially driven by a cooling labor market.
• Andrew Milgram warns of a "false dawn" regarding private credit health, predicting defaults and winners/losers will eventually emerge as data matures.

Strategic Evolution and Technology

• The private equity business model is evolving from Leveraged Buyouts (LBOs) focused on financial engineering to operational strategies utilizing technology and data.
• Artificial Intelligence (AI) is being integrated into secondary markets to price portfolios and assess risk, potentially reducing investment team sizes by 25%.
• Firms are increasingly leveraging AI and data scientists to create predictive models for investment decisions across broad economic sectors.
• The "democratization" of private markets is progressing through open-ended vehicles, non-listed REITs, and separate accounts, allowing access for high-net-worth individuals.
• Co-investments and continuation funds are becoming critical components of successful fund structures, with LPs viewing them as distinct asset classes alongside primary fund commitments.
• Innovation remains accessible via private markets, particularly in decarbonization technologies, though early-stage VC has been negatively impacted by rising rates.

Leadership and Future Advice

• Effective leadership during uncertainty requires over-communication, explicitly matching younger, inexperienced staff with veterans to explain historical crisis contexts.
• Panelists identified "humility" as the most critical trait for long-term success, citing the danger of hubris following successful periods.
• The primary mistake investors can make in the current environment is overpaying for assets or relying too heavily on past pattern recognition.
• Investors are advised to prioritize hiring and partnering with high-quality human capital over selecting based on brand recognition.
• Future growth for the industry relies on the ability to navigate complex compliance, tax, and regulatory burdens, which favors larger, more institutionalized platforms.