Unlocking hidden wealth: the rise of private assets

Investing in private assets

Over the past decade or two, some of the world’s biggest investors have looked increasingly beyond equities and bonds in search of attractive returns – and their search has led them to private assets.

Unlike public market investments, private assets such as private equity, private debt and real estate generally involve higher risk, lower liquidity and longer-term commitments, making them more appropriate for sophisticated investors.

But against a backdrop of rising geopolitical tension and market swings, private assets have provided investors such as endowment funds, which seek to preserve the purchasing power of their assets in perpetuity, with an antidote to short-term volatility while opening the door to a much broader range of assets than those offered by public markets.

Géraldine Sundstrom, Head of Investment Offering at Pictet Wealth Management, says that the success of endowment-style investing pioneered by many universities, foundations and large institutions has inspired smaller sophisticated investors looking to building wealth for the benefit of future generations.

“Many professional investors are taking an endowment-style approach in which they forego the benefits of short-term liquidity in favour of a longer-term view,” says Sundstrom. “By committing to illiquid assets and thinking multi-decade – even multi-generation – endowment-style investors can benefit from the compounding effects of potentially incremental positive annual returns.”

Ruth Yang, Global Head of Private Markets and Thought Leadership, S&P Global, the financial-information services company, says that a large part of the extraordinary growth in private assets – the private-debt market grew from $41bn of assets under management in 2000 to an estimated $1.3tn in 2022 – has come from the quest for yield during more than a decade of historically low interest rates.

“Pension funds, endowments and private wealth have all been putting more of their money into private assets in the search for the best return on investment,” she says. “In a low-interest-rate environment, there has been a big shift, and the expectation is that it will continue to grow.”

Yang says that institutional investors such as the big pension funds and endowments now have an estimated 20 per cent of their portfolios in such assets compared with about 5 per cent just 15 years ago.

The expanding universe of private assets

But Sundstrom argues that several other structural factors have made investors aware of the potential of private assets.

First, a growing number of companies are delisting from public markets. In the case of the London Stock Exchange, for example, there were 1,775 listed companies in May this year, sharply down from the 2,429 listed at the start of 2015. It is a similar story in the US.

For investors, that shift has added to the already large pool of privately held companies looking for funding in the private debt markets. Indeed, 87 per cent of all US companies with revenues in excess of $100m are privately held. “Publicly traded companies are just the tip of the iceberg when it comes to investing in businesses,” says Sundstrom of Pictet Wealth Management. “Private markets provide investors with a much broader universe of companies to choose from, which means that if you neglect private equity as an investment you exclude a substantial portion of the investment possibilities out there.”

The shifting dynamics of value creation

A second structural factor fuelling investment in private assets is that much of the value creation within organisations is taking place at an earlier stage in companies’ lives. Importantly, it is also happening before they go public through initial public offerings (IPOs).

Sundstrom attributes this phenomenon to companies staying private for longer – which they are able to do thanks to the growth of available private funding. That, in turn, shifts much of the value creation to the private space. “Companies these days are delaying going public until they are more mature and profitable,” she explains. “Going private not only gives access to a much broader universe of companies but also to a potentially bigger share of the value creation.”

A new generation of investors

All of this is taking place amid the greatest intergenerational wealth transfer in history. In the US alone, an estimated $84tn is set to be passed from the baby-boomer generation to millennial and Gen X heirs between now and 2045. Of that, about $16tn of wealth will be transferred over the next decade. Across the UK and Europe, it is a similar story.

As that inter-generational transfer unfolds over the coming years, endowment-style investing offers individuals, families and family offices the chance to capitalise on the long-term, wealth-building vision that many of them share with conventional endowment funds, says Sundstrom.

“It’s an approach and a set of principles that is readily transferable to the right investors, to build portfolios that provide enduring, sustainable income across the generations.”