Partners Group: Private markets AUM to hit $30trn within next cycle

The size of the global private markets industry could become larger than the current gross domestic product of the US within the next economic cycle, according to estimates by Partners Group.

In a white paper titled Private Markets: The New Traditional Asset Class, Steffen Meister, executive chairman at the Switzerland-headquartered firm, noted he expects private markets assets under management to triple from the $10 trillion figure recorded in 2020.

The addition of capital from wealth management channels, retail investors and defined contribution pension plans – in addition to an almost 12 percent compound annual growth rate over the next five years based on institutional investors’ target allocations – makes it “credible to forecast that the private markets industry might reach a size of $30 trillion by the end of the next market cycle”, Meister wrote.

Traditional asset managers and private wealth managers will have to consider providing their clients with access to private markets so they can benefit from returns in the future economy, he added.

Private equity is broadening its access to non-institutional investors, as Private Equity International covered in its 2023 democratisation report. Firms including KKR, Blackstone, Apollo Global Management, Ares Management and Ardian have ramped up efforts to build out their wealth units, with some noting that the wealth channel could contribute to between 25 and 50 percent of their future inflows.

London-headquartered Hg, meanwhile, is in the nascent stages of adding a dedicated unit within its client services team that will be focused on individual clients and their wealth advisers, as well as family offices, PEI reported this month. Partners Group itself formalised its private wealth business unit in November.

Fuelling private asset classes’ growth is the role reversal between private and public markets, according to Meister. Speaking at PEI Group’s London offices last week to present his white paper, Meister said public markets have lost share to private markets as they have become more focused on opportunistic IPOs of so-called “spotlight” companies. Private markets, on the other hand, are financing the real economy and “foundational” companies.

“If you look at IPOs [today], these are typically companies that are not profitable – the DoorDashes of the world, or companies even less mature than that,” he said. “If you look at the actual role of the IPO, it’s probably more of a technical exit window for venture and growth capital investors, but there’s not much of a role in financing the real economy.”

Private markets are increasingly financing mature enterprises, building businesses and creating value through organic growth and operational improvements, according to Meister.

“Today, private markets finance, to a large extent, profitable businesses and assets – including many businesses providing essential, everyday services across the whole spectrum of private equity, infrastructure [and] real estate. In that sense, the share of financing the real economy is a much higher one in private markets than public markets IPOs.”

The number of public companies is falling in major western markets. In the US, the number of IPOs has halved since 1996, according to Morgan Stanley data from 2020, while in the UK, there were roughly 3,200 listed companies in 2007 versus around 2,000 this year.

Burdensome regulation and a focus on what Meister refers to as “governance correctness” have made going public less attractive, he said. Many businesses of around $2 billion to $3 billion, or even up to $10 billion, in size do not see the benefit in going public, as box-ticking exercises and sometimes misguided attempts to define what is relevant for shareholders can mean public companies spend less time focusing on their long-term strategies, he added.

“There’s clearly a disincentive to be public, just by the regulation [needed],” he said.

In the white paper, Meister points out that in 2016, capital raising by private markets overtook public market equity issuance “and has continued to do so ever since”.

Asked if Partners Group sees IPOs as a less attractive exit route for its portfolio companies, Meister said his firm took an opportunistic approach. While it is always in favour of a private markets exit route as an option, the firm has a fiduciary duty to take the best exit for its clients and investors and would always list a company if it offered a higher valuation than other options.

“It’s better for the management team. I think it’s a better environment for the company to have long-term plans, to see the company really developing according to their long-term goals.”