Private Markets: An Asset Class for all?

Now a $13 trillion asset class, with estimates suggesting it is likely to grow to $20 trillion within the next 5-years¹, private markets are now an option no investor can afford to ignore. Consequently, there has recently been a clear push both by the EU (European Union) and European regulators to promote investment vehicles more suitable for non-institutional investors.

Private markets are now an option no investor can afford to ignore.

Why do Investors need Private Markets?

Whether institutional or retail, in terms of addressing investment needs, the case for considering private market investment is compelling. The investment solutions the asset class can provide are likely to prove attractive to all investors. Potentially higher returns, diversification, reduced portfolio volatility – these investment objectives are sought by a broad range of investors. Many investors typically have longer term investment horizons – ideally suited to many private market strategies. Real assets, a core option within the private markets’ universe, largely comprise directly held real estate and infrastructure businesses. These are proven providers of long-term, reliable and frequently inflation-linked, income streams.

The case for considering private market investment is compelling.

Current trends suggest the opportunity set within private markets is only likely to grow fuelling the incentive for the asset class to extend its investor appeal. Companies are choosing to remain private for longer and public banks continue to retrench from key lending segments, supporting demand for private credit. Indeed, the ‘democratisation’ of private markets would appear to be in the interests of a broad range of investors, asset managers and portfolio companies themselves.

What Role can Private Markets play within a Portfolio?

Perhaps the most important attribute of private markets is its ability to introduce genuine diversification within a traditional balanced portfolio. Normally a typical balanced portfolio e.g. pension fund, would have an allocation to both public equities and public bonds. The rationale is that both asset classes historically have behaved in an uncorrelated manner, helping manage return volatility within a portfolio. In other words, they had a negative correlation providing a natural risk/return hedge for portfolios. The problem is that this historic relationship has recently broken down.

Public equities and public bonds are more likely to move in tandem rather than independently.

The principal cause for this breakdown in the traditional equity/bond correlation has been due to a sustained period of volatile and high inflation. Consequently, both public equities and public bonds are more likely to move in tandem rather than independently. Fortunately, private markets have either a low or negative correlation with either public equities or public fixed income and can play a role as a powerful portfolio diversifier. Many private markets are also strong beneficiaries of major global growth themes. Energy transition, decarbonisation, affordable housing, infrastructure renewal.

Private markets are strong beneficiaries of major global growth themes.

Greater Investor Accessibility

Confidence that access to private market investment opportunities will widen to a broader set of investors can be taken from recent market developments. Prime among these would be the EU response, recognising the need to boost investment in the real economy and further promote sustainable and inclusive growth, with the introduction in 2015 of the ELTIF Regulation (European Long-Term Investment Fund), and more recently in France with the Green Industry Law, and in the UK with emergence of LTAFs (Long-Term Asset Funds). These open-ended vehicles,specifically created to widen investor access, overcome some previous impediments.

Indeed, greater participation in private markets was still limited by persistent investor concerns about lack of liquidity/tradability. For this reason the EU updated ELTIF Regulation in January 2024 with ELTIF 2.0. The big difference is the expanded scope of eligible investments which can be held in such funds and the minimum size of investment. Specifically, ELTIF 2.0 completely abolished the previous €10K minimum investment required, but more importantly raised the market capitalisation threshold for portfolio holdings from €500m to €1.5bn. Having larger companies held in these funds increases available liquidity for investors.

Whilst these developments are unquestionably steps in the right direction, a remaining obstacle in opening up private markets to a wider audience is a clear knowledge gap. For many investors (and advisers) private markets as an investment area remains relatively unfamiliar. The non-publicly listed nature of the investments held understandably causes some investor concern. Misconceptions exist and it will primarily be the role of asset managers to provide the required tools and education in order to provide reassurance.

The political and market will clearly exists to promote wider access to this important and valuable area of investment. ELTIFs now allow a range of private investor-friendly fund offerings. The important next step is for asset managers to take responsibility in walking investors further along the private markets path.

Manager Selection

We believe those best suited to address these challenges and capture private market opportunities will be asset managers with the strongest pedigree and demonstrable expertise. With 25-year experience within private markets and over 500 professionals managing. €90 billion of private assets2, M&G Investments is well placed to lead this transformation. We have already launched our first private credit ELTIF with close to €900m under management², and plans are in place for the launch of a fund under the French law. Our asset owner/asset manager model will further ensure we can continue to seed and scale innovative solutions.

Investment involves risks. The views expressed in this document should not be taken as a recommendation, advice or forecast.

Kelly Hebert, Country Head, France, Belux, Global Head of Sustainability & Impact Development, M&G Investments

¹Source: 2025 Private Markets Outlook, a new era of growth, BlackRock.
²M&G Internal data as of end of December 2024.