Today’s macroeconomic backdrop is one of rising inflation, higher interest rates, and slowing growth. Investors are reviewing their options in this era of uncertainty.

Many are looking to enhance portfolio resilience and to bolster returns. We believe an allocation to private markets – such as real estate, infrastructure, private equity, and private credit – is a compelling option.

Larger set of opportunities

Private markets have grown phenomenally in the last two decades. By our numbers, assets under management in the sector climbed from less than a trillion in 2000 to over $13 trillion in 2022. We’ve also seen a drastic decline in the number of public companies. Many businesses are choosing to remain private for longer. Investors seeking exposure to fast-growing and innovative companies are therefore turning to private markets.

New regime beyond 60/40

Recent market volatility has shown the relationship between equities and bonds is not as uncorrelated as investors once thought. Consequently, the traditional portfolio allocation of 60% equities and 40% bonds is challenged. Many are breaking this mold in pursuit of diversification, with private markets becoming an increasingly popular option.

Unlocking growth through long-term trends

Private markets can help investors tap into long-term structural growth trends. The pandemic accelerated many of these themes, creating opportunities across healthcare, food, and finance. Technological innovation is also playing a significant role across these industries, offering another avenue to growth.

The transition to low-carbon economies and net zero are major investment themes. Meanwhile, the war in Ukraine has confirmed the importance of energy independence and security. As a result, we expect a significant increase in investment in renewable energy and energy-efficient technologies. Investors can directly access this trend through areas like renewable infrastructure and private credit funding for new technology and innovative energy solutions.

And then there are demographics. Developed market populations are ageing faster than emerging markets. Consumer demand is shifting to services, particularly healthcare, with a greater focus on sustaining wellbeing. Indeed, during the pandemic, the need for faster broadband and digital health increased, which expedited the need for telehealth, virtual consultations and e-pharmacy. We expect this trend will continue.

In emerging economies, investment in urban development and infrastructure will be crucial to support younger populations. We anticipate considerable opportunities across transportation systems, utilities, and social infrastructure (e.g., schools and hospitals).

Thinking diversification

We believe building a resilient portfolio will be key to navigating market volatility. An allocation to private markets is one way to achieve diverse returns.

But investing in private markets is not so easy. The market is complex and requires selectivity, experience, and skill to identify the right assets. Investors should also consider their allocations in relation to their targeted outcomes. There’s a necessary trade-off between high returns, low costs, and exposure to greener assets. One cannot achieve all these aims. The optimal portfolio therefore depends on the investor’s investment objectives.

On the back of this, we’ve seen a resurgence in interest for diversified private market products. One of their key benefits is access to private markets with smaller commitments than traditionally associated with the asset class. They also use long-term asset allocation to meet specific outcomes. The depth of diversification (asset classes, geographies, and vintage) and implementation (primary, secondary, or direct/co-investments) are key differentiators. The quality of fund managers, track records and fee structures are also important considerations.

Final thoughts

In our view, a fully diversified portfolio of private market assets should help investors optimize their risk/return profile, with the potential for higher returns and reduced volatility. The successful implementation of such an approach requires expertise not only in private markets, but also in multi-asset investing. It’s rare that managers can demonstrate both – a segment of the market to watch over the coming years.