Author: Amaraj Flora
Senior Portfolio Assistant & Investment Committee Support
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Published: December 2024
Private markets, encompassing private equity (PE) and private credit, bring unique growth and income prospects but require careful consideration in today’s challenging economic landscape. While they add some diversification to portfolios, recent conditions urge a selective and cautious approach.
PE covers a spectrum, from early-stage venture capital to buyouts to growth investments in established companies, offering high potential returns. Yet, this asset class presents complexities: limited diversification benefits, high leverage, and substantial fees can weigh on portfolio returns. Additionally, private equity faces liquidity challenges, with over $3 trillion estimated in unsold investments as IPOs slow down (Source: Bain & Co. report, as cited by the Financial Times, October 16, 2024) and there are concerns that infrequent valuations might obscure true volatility and risk, adding uncertainty for investors. However, private equity’s focus on value creation and active management may allow it to outperform public markets over time, particularly when GPs prioritise operational improvements rather than financial engineering.
Private credit originates from non-bank lending post-Global Financial Crisis, providing steady income through structured protections, filling the gap left by traditional bank loans. The rapid expansion of private credit, particularly in partnerships between banks and private firms, has also raised concerns about over-lending and potential opacity in asset valuations, echoing risks seen in high-yield debt. Still, for defensive portfolios, private credit can offer an attractive yield alternative to public bonds, especially when underwritten with careful attention to quality and structure.
Given the high valuations, limited exit avenues, and emerging risks, both PE and private credit investments require prudent selection and timing as there are strategic implications for portfolios. In a balanced portfolio, private market investments can enhance both growth and defensive allocations, offering returns less correlated with public assets. Yet, for now, we maintain a cautious stance, staying alert for potential opportunities when valuations and competitive pressures ease.
Navigating private markets effectively involves weighing both their distinct benefits and inherent risks, recognising that while they are powerful tools for portfolio diversification and income, selectivity and timing are essential for maximising their value in today’s climate.
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Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
