Private markets are switching roles with public markets in financing the real economy, setting the stage for fundamental change within the institutional investment industry, according to research from Partners Group.

To put things into perspective, Partners Group’s study pointed out that after the global financial crisis of 2008, it was predicted that private markets had peaked. Since then, however, private markets have more than tripled to $10trn (€9.1trn).

Given the size of the market and its continuing growth, the research concluded that private markets will attract new entrants, including major established financial groups looking to benefit from this growing sector.

As the private markets industry becomes more crowded and competitive, private markets firms will need to differentiate themselves through their offerings, cost structures and client service, Partners Group said.

Most importantly, according to the research, “they must become differentiated by their approach to investment”.

Partners Group asserted that private markets firms “will need to differentiate themselves between active and passive investment strategies as the industry attracts new entrants.

“In private markets, being active means far more. Active private markets firms are those that roll up their sleeves and truly engage with their portfolio companies – analysing, guiding, strategising, and transforming businesses,” it said.

Steffen Meister, Partners Group’s executive chair, argued that “private markets are overtaking public markets in financing the real economy” and “this role reversal is set to fundamentally reshape the private markets industry in the future”.

Meister also believes that the financing of business is undergoing a major transformation. “The corporate IPO, once the sign of a mature business coming to market, is now more often the preserve of young and unprofitable businesses that may not prove successful. For example, the proportion of listed companies in the US with positive earnings at the time of IPO fell from 85% in 1990 to 21% last year. Meanwhile, private markets, once known as a venue for opportunism and financial engineering, have increasingly turned to financing healthy businesses and creating value through organic growth and operational excellence,” the research said.

Meister added: “Private markets have been on an evolutionary journey in recent decades and the industry is increasingly taking over from public markets as the stewards of the real economy.”

Partner Group’s research explains that “in an increasingly challenging and competitive business environment, where constant transformation will be required for companies to keep pace with change and opportunity, active private markets firms will need to more closely resemble industrial groups than financial services businesses”.

The study also asserted that “investors seeking to align their investment portfolio to the foundations of the future economy must increasingly consider that private markets provide the best access to many real economy assets. Meanwhile, regulation will adapt as private and retail investors take a greater interest in private markets”.

Meister added: “We are seeing rapid growth and disruption across global mega themes such as digitisation, decarbonisation, and ‘new living’ driven consumer habits, as well as accelerating technological advances. Against this backdrop, modern private markets firms will need to be strategically agile and entrepreneurial to lead their portfolio assets to success and build our future sustainable economy.”

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