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Rising volatility driving growth of private markets

Allfunds’ David Perez de Albeniz says growth in private markets is accelerating amid increasing volatility in traditional investment markets. PHOTO: ALLFUNDS

SINGAPORE - Rising volatility in traditional investment markets and the search for higher yield is driving a steady growth in private market investments, especially amongst non-institutional investors, according to David Perez de Albeniz of private market intermediary Allfunds.

“The size of the global private market, which comprises largely of private equity, private debt, venture capital and investment in infrastructure, now stands at well over US$12 trillion (S$16.4 trillion),” Mr Albeniz shared.

Asia accounts for about 22 per cent of this, with Europe taking up another 20 per cent.

Mr Albeniz said the private debt market had weathered the industry downturn well in 2022 and continues to be in demand as it fills the the gap left by banks which might not be lending.

“Infrastructure continues to be in high demand and should continue to benefit from the US$15 trillion projected global infrastructure spending gap up until 2030,” he said. “Meanwhile, private equity will make a comeback once interest rates stabilise as there are there are huge opportunities.”

The private market comprises of privately-owned companies which are largely funded by founders and institutional investors. In contrast, the public market involves companies and entities which are traded on the stock market and can be invested by the general public.

Mr Albeniz pointed out that fewer than 15 per cent of companies with revenue over US$100 million are publicly held. This portends huge opportunity in the private markets, especially in private debt and equity.

Some 85 per cent of investors in private markets are supranationals, endowment funds and pension funds.

But the retail segment, which accounts for the remaining 15 per cent, is starting to show higher growth.

“While the overall market is growing at about 8 per cent annually, the retail investor segment growing at a relatively higher rate of 12 per cent year on year now, albeit from a lower base,” Mr Albeniz said.

He added that given the increasing volatility in traditional investments such as equities and bonds, there was a growing appetite from high-net-worth investors for private market investment opportunities. Also driving demand was falling bond yields amid the high interest rate environment.

Allfunds estimates about 1 to 3 per cent of total private banking assets are now in private markets.

“In Asia that could represent somewhere around US$30 billion for the top ten private banks,” Mr Albeniz said. “Almost every private bank we have spoken to is aiming at having 15-20 per cent of their clients’ assets allocated to these alternative strategies. The growth outlook is very strong.”

Growth has been particularly strong in Asia, with China accounting for 80 per cent of the region’s private market investments. But activity in other parts of the region is gaining momentum.

Mr Albeni added that Allfunds is seeing bigger opportunities within South-east Asia, especially Singapore and Thailand. Hong Kong intermediaries are also showing huge interest, he added.

“From a country allocation perspective, India seems to be in fashion”.

Allfunds matches investors with private market investment opportunities. It does this by working with general partners (GPs) such as banks, insurance companies and fintech platforms. Its revenue comes from a portion of fees earned by distributors.

“We enable banks and other intermediaries to put private market products on their shelves for their clients,” Mr Albeniz explained. “On the sell-side, we work with institutions like Apollo, Blackstone, Carlyle, Morgan Stanley and others who share our same vision and strategy, and launch vehicles targeting this wealth segment.”

But the distribution and marketing infrastructure still needs to be built up, he added. This includes creating the right vehicles, hiring sales professionals, incorporating customer service, public relations expertise, and developing communications strategies.

“Conventionally, products which invest in private markets strategies came at a huge cost of doing business for intermediaries such as banks, insurance companies and wealth managers. Not only were there not enough products, but their intrinsic characteristics, such as illiquidity and infrequent valuation, made them very difficult to deal with.”

While not all GPs are used to dealing with retail investors, the bigger ones have taken the lead and are setting up shop around these new investors’ needs, Mr Albeniz said.

He added that Allfunds, together with some of the industry’s leading GPs, is working to bring efficiency to the marketplace so that intermediaries can access the new generation of products in a seamless and less costly manner.

“Our goal is to make private markets accessible to individual investors by working closely with distributors such as banks, insurance companies and fintech platforms,” he said.

Going forward, Mr Albeniz sees increasing sectorial opportunities in private markets within tech, healthcare and energy transition sectors.

“Inflation, rising interest rates and higher energy prices have fueled interest in oil and gas, infrastructure and US real estate as an inflation hedge,” he said.