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Investment continues to flow into private markets. In the wake of COVID-19, however, private markets managers face challenging economic conditions and a more complex definition of what constitutes value. As private markets come to make up an increasing proportion of the global capital markets, the sector is also becoming more regulated and scrutinised than ever before. How can you reconfigure your value creation playbook to outperform in this tough environment? You’ll need a strategy that focuses more closely on strategic positioning, operational excellence and capital efficiency in your business and the portfolios you manage.
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Prime Time for Private Markets: Overview
Will Jackson Moore, PwC's Global Private Equity, Real Estate, and Sovereign Funds Leader, talks us through the outlook for private markets and the new private markets playbook, including focus on ESG.
Forces driving change
- Returns are harder to find
- Stakeholder attitudes are moving the goalposts
- There’s still growth to seize
- Big firms are dominating, but specialists can still drive alpha
Returns are harder to find
Downturns can increase opportunities for private markets managers, particularly when it comes to acquiring companies, infrastructure or real estate assets at reduced cost.
But these openings might not be enough on their own to help managers deliver target returns. COVID-19 has upended economies in broad ways and entry multiples are high. So, managers need to find other ways to boost returns and create new types of value.
There’s evidence from the last global recession that dedicating resources to value creation pays off. Private equity firms with value creation teams experienced a better rate of return during the recession than those without dedicated teams.
Stakeholder attitudes are moving the goalposts
Investors are the main reason that environmental, social and governance (ESG) has become more than a tick-box exercise in fund due diligence. Regulators are also pushing. Many politicians and civic groups want COVID-19 to be a catalyst for a fairer and greener economy. Campaigns such as #MeToo and Black Lives Matter have also put a spotlight on diversity, equity and inclusion. And importantly, some investors are coming to see ESG as a key source of value preservation and generation, rather than simply being an altruistic or reputational priority.
There’s still growth to seize
Investors continue to look to private markets to deliver the yields that lower-risk and more liquid asset classes struggle to match.
As a result, we expect assets under management (AuM) in private markets to expand—as seen in the chart—depending on the trajectory of economic recovery in the years ahead. Under the base-case scenario, private markets would make up more than 10% of global AuM by 2025, constituting a small but fast-growing and high-impact slice of the capital markets.
There’s not a significant difference between the recovery scenarios, which underlines how resilient private markets are. Even in the worst-case scenario, we project AuM growth of almost 50% from 2019 to 2025.
Big firms are dominating, but specialists can still drive alpha
Private markets are becoming increasingly competitive and concentrated. Institutional investors’ shift to multi-asset mandates is making it difficult for smaller, single asset–focused managers to compete with big, diversified rivals. And because of the costs and complexities of due diligence, some investors are also restricting their commitments to fewer firms.
The leading firms are increasingly dominant. A clear sign of this is their ability to raise larger mega-funds over time as depicted in the graphic. There’s still room, though, for specialised players with the right capabilities, brand strength and multi-asset strategies. The firms that are most vulnerable are those that have neither scale nor specialisation. They risk being squeezed out of the picture.
Private equity is the ‘asset class of the moment,’ as opportunities for acquisition and corporate turnaround increase. Strong fundraising has heightened pressure to put dry powder to work and has therefore inflated valuations. The challenges will have managers looking for new ways to create value, including through ESG.
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COVID-19 has effected little change in some subsectors of infrastructure, such as energy, but it has caused sharp decreases in revenue from once-stable sources of return such as airports. Some assets, such as fibre optics, are now moving into the central core.
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COVID-19 has reduced retail footfall and led to widespread deferment of rental income. In the longer term, the pandemic is likely to accelerate remote work and online shopping, potentially leading to a rise in empty office and retail space. However, investment and growth potential remain strong.
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Nonbank lending expanded rapidly after the global recession of 2008–09 and now exceeds bank lending in advanced economies, even in Europe. The largest capital deployment opportunities are likely to be in rescue financing, real estate, infrastructure and direct lending.
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How private markets can continue to outperform
You’ll want to go beyond a few small tweaks to your playbook in order to respond sufficiently to the changing value ecosystem. Here are some of the moves we think you’ll need to make. Download our report for full details.
Deliver a plan for how you’ll navigate the new value ecosystem
Make sure you have the talent you’ll need
Use technology to gain a competitive advantage
Pick your spot—specialise or diversify?
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Partner, Global Sustainability Leader, PwC United Kingdom
Tel: +44 (0)7710 157908
Eric Janson
Global Private Equity, Real Assets and Sovereign Funds Leader, Partner, PwC United States
Tel: +1 617-834-4900