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As money continues to pour into private markets, concerns are mounting that the sector is expanding too fast in an unfriendly environment.
In recent years, there has been an explosion of interest in private markets, with fundraising doubling over the last decade, leading to $13.1 trillion (£9.9 trillion) in assets under management across the sector.
Institutions have been pivoting more towards private markets too, from the launch of long-term asset funds in the UK to the government’s push for pension funds to invest at least five per cent of their assets in the sector by 2030.
More than anything, with London’s public markets in such a weak position, many seem to be hoping that private markets might be the salvation for falling profit for money managers.
But problems such as low liquidity, turbulent markets, and more money flowing in than can be spent are all causing analysts to worry.
“Private equity is approaching a tipping point,” Philitsa Hanson, global head of product at Allvue Systems, told City AM.
“Limited partners are not seeing the expected distributions to paid capital due to muted M&A and IPO activity. The situation becomes more complex when you factor in having to rebalance portfolios amid uncertainty over rate cuts, inflation, and geopolitical instability.”
Private equity investors are now facing historically low distribution rates and are eager to get their cash back, but are increasingly struggling as public markets take a sharp downturn.
“They’re waiting for liquidity and saying, I don’t want to just keep giving you more money. I want my money back,” said Hamilton Lane co-CEO Erik Hirsch.
IPOs have slowed down in the US and especially in Europe and the UK, with only five IPOs on the London Stock Exchange so far this year, cutting out an often-used method for investors to receive cash returns.
The poor market for floats worsened in the run-up to Trump unveiling his sweeping tariffs earlier this month, as reports emerged that IPOs in the UK and US are being put on hold as a result of the market chaos.
Earlier this month, Buy Now Pay Later company Klarna paused its IPO thanks to the tariffs, delaying planning to launch on the New York Stock Exchange.
Are private markets overloaded?
In addition, Hanson explained that there was “so much desire for investment on the private side,” as the constant flow of cash into the sector continues to increase, that holdings are more and more frequently being passed between private equity houses themselves rather than floating on stock exchanges.
“Where will the demand come for those assets, and how will you put all that cash to work in a way that serves the investor well over the long term?” asked Laura Lutton, global head of manager research at Morningstar.
“You would not want to see a lot of private assets chasing the same deals and bidding those up like that’s not helpful to the end investor.”
However, while there is a clear correlation between more money raised and returns coming down in the venture capital space, this has seemingly yet to extend to the wider private markets sector.
“We’ve had years with record dry powder who have had terrific performance years, and we’ve had years with even more record dry powder who have had not great performance years. So to date, dry powder hasn’t really been correlated to much of anything,” said Hamilton Lane’s Hirsch.
Hirsch was also keen to stress that while private markets are growing rapidly, they are still relatively small compared to the trillions on public markets.
“If you took all the money raised last year, all private markets, forget just equity, you couldn’t have bought Apple,” he said.
Despite concerns about exits, money is continuing to flow fast into the sector, especially from retail investors, though the inability to easily sell out of funds has turned many off.
Private equity’s middling returns
While there has been a push for retail investors to access private markets through semi-liquid or evergreen funds, these come with clear downsides.
These funds tend to invest in later-stage rounds when much of a company’s valuation has already been established, thus curtailing their upside.
“Mutual funds’ private-company positions both lost value more frequently and saw fewer explosive winners than a cohort of publicly traded peers,” a recent Morningstar report found.
These private holdings generated just a 14.1 per cent return over the last 10 years, and absent Spacex, lost about 1.3 per cent on their private positions in the last decade.
Valuations continue to be a concern for the sector, as many have noted that while US equity markets have been on a steady (and then sharp) decline since the start of the year, US private markets valuations continued rising until Trump’s tariff rollout.
The Bank of England and Financial Conduct Authority have both warned of the “opaque” valuations in private equity, while a media narrative has formed that private equity companies are ‘marking their own homework’.
Even with the same private holdings, asset managers continue to materially disagree on their valuations.
Tiktok owner Bytedance, for instance, is held by Fidelity at a 43 per cent higher per-share valuation than where Blackrock holds it. An investor at Fidelity, through the NAV they transact at, is paying (or receiving) 43 per cent more for the same asset as an investor at BlackRock.
In addition, the unsaid part of private markets is their costs: While index funds continue to boom in popularity due to their low costs, private markets represent a new way for asset managers to high fees
“The fee schedules are very complicated and difficult to compare, many of the fees are incremental and based on returns, so you really need various scenarios to help you understand in advance what you’re likely to pay for different levels of return,” said Morningstar’s Lutton.
“We just have a much different standard, transparency standard in the public markets than we do on the private side”
Hirsch also said that on the private equity side in the UK, the rapid expansion of markets was starting to cause a strain on talent, as a relatively small number of funds managers are suddenly coping with billions flowing into the sector.
“I think there’s still a lot of kind of grappling for talent,” in the private credit space, he added.
