Equity markets have been the growth engine for the portfolios of many asset owners globally, fuelled by decades of low interest rates, rising economic growth and a relatively benign geopolitical backdrop.
But that seems like it’s beginning to change. Faced with increasingly fickle public markets, fewer and fewer companies are pursuing IPOs, while concentration risk has big investors questioning the size of their exposure to liquid assets.
“I think we’re seeing an evolution towards private markets because public markets are not functioning as well as they used to,” Anne-Marie Fink, chief investment officer for private markets and funds alpha at the $132 billion State of Wisconsin Investment Board (SWIB), told the Top1000funds.com Fiduciary Investors Symposium at Harvard University.
It’s getting “harder for companies to live in the public markets”, Fink said. But private market investing can remove some of the intermediary layers between companies and investors and allow both parties to properly orient their strategy towards the long term. SWIB’s portfolio is 65 per cent public assets, 20 per cent private equity and debt, eight per cent in real estate and 19 per cent in inflation-sensitive investments.
“We’re not all in privates, and we do think that publics have a place in our portfolio – in fact, a bigger place,” Fink said.
“We find that we get better returns from privates, just generally, relative to publics. We think they have advantages in terms of the way the governance works, the ability to plan things over a four- or five-year timeframe as opposed to a quarter-to-quarter timeframe, and then there’s the collaboration between your owners and your management teams of your companies. So for that reason we expect that private equity will outperform public equity.”
Gold rush
But the weight of money moving into private markets – a gold rush for established and new managers – belies the fact that many of the fund and fee structures on offer have not been particularly advantageous to their investors, while plenty of private market managers have grown up in the same benign macro environment that’s propelled public equities higher.
“There’s a lot of people that haven’t lost,” said James Clarke, global head of institutional capital at Blue Owl. “I’m 50; there’s a lot of people that are 40-odd, and they were 25 during the Global Financial Crisis, even younger, and they’ve had a tailwind of low cash, they’ve had a tailwind of people increasing private markets exposure.
“I think that the whole system has changed; I think that it’s moved from a tactical to a strategic allocation. I would say if Blue Owl, or formerly Owl Rock, had started in 2025 and not 2015 there would be zero reason for us to exist. None. I honestly mean that, and I mean that because a new entrant in this space right now would be awfully difficult. The world needs another private credit manager like it needs a hole in the head.”
To stay relevant, GPs can’t poke their heads out every three years when they want money for a fund. LPs want partnership for the long-term value add it brings to their portfolios, and the firms that don’t get that are “going to languish”.
“Why is that beneficial? There’s scale,” Clarke said.
“There’s a fee premium through co-investment, it’s a volume discount that only a handful of managers can provide. Number two, they can access you in a way that’s more customised to their portfolio. It’s not a fund where they’re riding alongside XYZ $5 million investor. It’s SMAs, it’s funds-of-one, co-investment programs. And I encourage everybody to make sure that co-investment program is as tight as possible and replicates what the portfolio looks like, because I’ve seen co-investment programs at other firms and they can be 400 to 500 basis points off.
“There’s also fees. It’s not ‘we’re charging on committed capital’, it’s invested capital, in many cases it’s flat fees. The returns have compressed. I think it was a capital appreciation strategy in private markets and it’s now migrated to a capital preservation and income generation strategy, and that’s been the biggest change.”
Meanwhile, Kevin Kneafsey, senior investment strategist for multi-asset solutions at Allspring Global Investments, anticipates a “massive shrinking in this space” as more and more LPs realise that large chunks of the private credit, equity and real estate they’ve been buying offer them only “leveraged beta”.
“There’s a group in Chicago, Delaware Street Capital, that replicates private market assets with public market assets. The first thing they do is match the sector; the second thing they do is match the leverage. And if you do that you get a lot of what you’re getting. So if you want to pay two and 20, pay it for the alpha portion above the leveraged beta portion. I think that’s a washing out that’s coming. I think the fee pressure is coming.”
Kneafsey also thinks the market has gotten too large and that big investors “don’t need more of this” – but that many of the managers that already exist are solid, with strategies that make sense.
“When I was at BGI, back in the hedge fund heyday of the early 2000s, our CEO said there are now 5000 hedge funds. And he said there aren’t 5000 really smart people. Well, there are 17,000 private equity firms in the US. I guarantee you there are not 17,000 really smart people, and they’re all not in private equity. So this space is due for a real big shrinking and a rewriting.
“Do I think it’s going away? No, it makes a tonne of sense. There’s lots of reasons to finance companies in different ways, whether it’s venture, whether it’s private equity buyout or growth, whether it’s private credit funding these things. But the way it’s being done, the way it gets paid, the transparency – all of those things need to change.”
