"Dry Powder" And "Democratisation" – Trends In Private Market Investing
This publication talks to Broadridge, the financial technology firm, about trends in the private markets investments space, including the much-touted "democratisation" of access and the amount of unspent cash sitting on the sidelines.
While rising interest rates might cause headwinds for the burgeoning world of private market investing, the momentum in this space is as strong as ever, given the desire by high net worth individuals for yield, and the supply side of firms choosing not to list on stock markets.
Recent figures from Broadridge, the corporate services and technology firm, show that private wealth allocation to these markets is set to grow by $5 trillion over the next five years ($8.4 trillion by 2026. Separately, PKF O’Connor Davies has noted that there is plenty of spare cash, or “dry powder” in the private markets space that can be put to work: Global private equity dry powder stood at $2.3 trillion at the end 2021, 14 per cent higher than at the start of the year. (A different figure comes from Preqin, the research firm tracking alternative assets. It said there was $3.4 trillion of dry powder as of February. It covered private equity, private debt, infrastructure and real estate.)
With such eye-popping numbers it is necessary at times to step back to consider broader themes. For example, to what extent is investor access to the space widening out, or becoming “democratised,” to coin a popular term?
At the moment, HNW and UHNW individuals have more access to the space, Nabeel Ansari of fintech firm Broadridge, told this publication in a recent call. Ansari, who is part of a research and advisory team at Broadridge, joined the firm in 2020. He looks at global private markets, including what investors are doing (such as in the EMEA region).
The term “democratisation” of investments can be a bit misleading but there is a journey of wider access to previously hard-to-enter assets, he said. To the mass market, areas such as private equity, venture, forms of real estate and infrastructure still count as “alternative” assets.
“There’s been a desire for private market perspectives from both the client and advisor side of the table,” he said.
This news service discussed whether there is an excess of so-called “dry powder” (unused capital) in the space.
“Fundraising has been good and investors do want to benefit, but it has been a challenge for the industry. On the other hand, more companies are going private and staying private for longer. Companies are also less likely to go to banks as sources of capital,” Ansari said.
Broadridge works with advisors on improving their understanding of private markets, such as how to handle due diligence on managers, understand particular patterns of returns, etc.
Even when adverse events have occurred, demonstrating how liquidity can run dry, as with the Woodford funds saga, this can be helpful in sharpening appetite for advice and learning, Ansari said.
“The mass influx of capital to the private markets has evolved into a favourable market for borrowers and potential portfolio companies. So, the opportunity set may look slightly different in terms of risk and reward, but it still offers a pick-up in risk-adjusted return vs the public markets, and still outperforms this market over the long-term,” Ansari said.
This publication noted that the US Securities and Exchange Commission is reportedly looking at increasing the level of corporate disclosures from “unicorns” and others, closing some of the reporting gap between private and public firms.
One of the more material drawbacks in private vs public market investments is the accessibility of data on private companies. Transparency is also key for investors when they want to understand and assess the risks inherent in their investment. As transparency improves, so will an understanding of risk, financial and non-financial (i.e., ESG-related risk). This is an important stage in development for the private markets, Ansari added.
Developments in and around the private markets space continue. Platforms offering wider access, such as iCapital Network, CAIS, and Moonfare, have made plenty of news. As reported last week, ALTSMARK, the US-based private capital portfolio management and services provider for the wealth management industry, bought Finlight, an ultra-high net worth solutions provider located in the UK. That move tapped into the rising demand for such assets and for information on them.