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A crowded market demands a high degree of selectivity

In an environment of unprecedented low yields since the financial crisis, investors have shown a stronger appetite for risk assets— and private investments are no exception.

A proliferation of new private investment strategies has sought to meet investor demand, creating new opportunities for everyday investors. In fact, the level of dry powder* committed and waiting to be invested now stands at $1.6 trillion in the North American and European private markets, 40% higher than 2007 levels.¹

At the same time, strong demand has attracted a crowd of competition and lifted valuations. This, along with worries about an economic slowdown, has some investors wondering if the good times for private investments are coming to an end.

A wider range of outcomes

We believe the key to successful investing in private markets going forward will be the ability to choose experienced and knowledgeable portfolio managers and the right types of investment vehicles. The wall of capital allocated to private equity investments continues to grow, increasing the odds of less attractive returns in the years ahead. So, investors must be highly selective at this stage of the private equity market cycle.

Returns tend to vary much more dramatically across the universe of private investments and managers than they do in the public equity market. Therefore, while gains from private equity investments can exceed public equities by a wide margin, so can the losses. Private market investors must also be comfortable with lock-up commitments that can tie up capital for as long as 10 years.

New investments are on the rise

In the wake of the financial crisis, regulators placed restrictions on banks that limited their ability to lend. The private markets stepped in to lend capital and create private debt investments that have become increasingly popular with investors. The private debt market has returned roughly 10% each year since 2008 and offered higher yields than the public market. In this time, the universe also expanded to include investments such as real estate debt, venture debt, direct lending, credit special situations, and other strategies that help investors to fine-tune their exposures.

Evaluating the opportunities

Our approach to private investments is to evaluate opportunities over the long term and, when appropriate, take a contrarian view, recognizing that durable and sustainable investment themes often outperform today’s “hot” investments. This perspective helps us avoid getting swept up by the early enthusiasm for novelties like 3D printing, which lost its initial traction and is still struggling to become profitable.

We are also highly selective when evaluating private equity portfolio managers. Our rigorous selection process favors experts who offer a clearly identifiable value-add component as part of their core competencies, prudent governance practices and an established track record of building businesses. We are not interested in private equity managers who generate returns through financial engineering.

In 2020, we will continue to focus our efforts on taking advantage of skill disparities in the private market and finding general partners who demonstrate a high degree of investment discipline.