Private markets an asset class for all?

In terms of investment focus, it is hard to understand why a wider range of potential investors would not want to participate

The investment solutions which the asset class provides to institutional investors are of equal relevance to most other investors. Potentially higher returns, diversification, reduced portfolio volatility – these desired outcomes are not unique to only pension funds and insurance companies. Private investors often have long-term investment horizons – ideally suited to many private market strategies. Many may seek dependable income streams to fund retirement, school fees etc. Real assets, a core option with private markets, largely comprise directly-held real estate and infrastructure businesses. These are obvious providers of long-term reliable income streams.

Current trends further suggest the opportunity set within private markets is only likely to grow, fuelling the incentive for the asset class to extend its investor appeal. Companies are choosing to  remain private  for  longer  and  public banks continue to retrench from key lending segments, supporting demand for private credit. The democratisation of private markets would seem to be in the interests of a broad range of investors, asset managers and portfolio companies themselves.

Confidence that access will actually widen to more investors can be taken from recent market developments. Prime among these would be the emergence of LTAFs¹ in the United Kingdom (UK), and ELTIFs² in Europe. These open-ended vehicles, specifically created to widen investor access, overcome some previous impediments. Liquidity concerns are addressed by the ability to trade shares in these new funds. Regulation has greatly improved post the Alternative Fund Managers Directive a few years ago, including strict criteria regarding diversification and currency exposures. Further, in the UK, the FCA³ have confirmed they will be conducting a review of private market valuations. This is to be welcomed, as it will improve investor outcomes and provide clarity in certain parts of the market e.g. SDR⁴.

However, perhaps the single biggest obstacle to opening up private markets to a wider audience is a clear knowledge gap – among non-institutional investors, but also with many advisers

Being a relatively unfamiliar investment area, and likely holding certain misconceptions, there is a clear educational process which needs to be undertaken. These are wary investors and are looking to leading private market managers such as M&G Investments to provide this guidance and education. Only then will wider investor access become a reality.

We believe those best suited to address these challenges will be asset managers with the strongest pedigree and demonstrable expertise. With 25 years’ experience within private markets and over 500 professionals managing c.€87 billion of private assets⁵, M&G Investments is well placed to lead this transformation. We have already launched our first private credit ELTIF with a €700m commitment from our internal client, and plans are in place for the launch of LTAFs for UK DC⁶ schemes. Our asset owner/asset manager model will further ensure we can continue to seed and scale innovative solutions.

Whilst private markets is not a completely unknown asset class for non-institutional investors (wealth clients are established investors in private equity), a knowledge gap persists and the asset managers need to increase their range of private investor-friendly fund offerings. The heavy lifting now moves clearly to asset managers with the responsibility to walk a broader array of investors along the private markets path.

Investment involves risks. The views expressed in this document should not be taken as a recommendation, advice or forecast.

¹Long-Term Asset Funds.
²European Long-Term Investment Funds.
³Financial Conduct Authority.
⁴Sustainability Disclosure Regulation.
⁵Source: M&G, data as of 31st December 2023.
⁶Defined Contribution.

Joseph Pinto, Chief Executive Officer, M&G Asset Management