Private Markets 2022

Lofty valuations on the stock market mixed with a persistently low-yield environment since the financial crisis have forced institutional investors to look elsewhere for the returns they need. This has put alternative assets – such as private equity, infrastructure and direct lending – on their radars. With institutional investors expected to allocate more of their capital to private markets, we decided to examine these alternative assets in a supplement that centres on a roundtable discussion between asset owners, asset managers and consultants.

May 2022

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Lofty valuations on the stock market mixed with a persistently low-yield environment since the financial crisis have forced institutional investors to look elsewhere for the returns they need. This has put alternative assets – such as private equity, infrastructure and direct lending – on their radars.

Despite interest rates gradually rising, pension schemes and insurers are expected to remain bullish on alternative assets, with Preqin estimating that assets under management will swell by around $10trn (£7.8trn) in the next five years.

With institutional investors expected to allocate more of their capital to private markets, we decided to examine these alternative assets in a supplement that centres on a roundtable discussion between asset owners, asset managers and consultants.

We hope you enjoy this supplement.


Joanne Job

Managing director, head of investment consulting, MJ Hudson
Joanne Job is responsible for strategy reviews, manager selection, investment research and portfolio analytics as well as investment and operational due diligence of private market funds. Prior to joining MJ Hudson, she spent five years in the alternative investments group at Moody’s Investors and has also worked for GlobeOp Financial Services, ABN Amro Asia Securities and CirneInternational.

Christian Dobson

Portfolio manager, alternatives, Border to Coast Pensions Partnership
Christian Dobson manages Border to Coast’s private equity programme. He joined the pool in 2020 from the investment team of the £6.5bn Nationwide Pension Fund. Dobson has experience of a range of asset classes, including fixed income, equities, real estate and alternatives.

Anish Butani

Senior director, private markets bfinance
Anish Butani leads bfinance’s infrastructure coverage, where he has advised on more than $8bn (£6bn) worth of allocations since 2017. Prior to joining the consultancy, he gained more than 10 years of experience as a corporate financier, advising on mergers and acquisitions, financings and valuing infrastructure assets primarily at KPMG. Butani has also worked at infrastructure developer John Laing, where he was responsible for leading the divestment processes of its project portfolio

Dan Aylott

European head of private equity research Cambridge Associates
Dan Aylott leads Cambridge Associates’ Europe, Middle East and Africa (EMEA) private equity and venture capital research team. He also advises pension funds, private wealth clients and foundations on managing global private investment portfolios. Aylott has more than two decades of private investment experience. This has included being responsible for private equity at Kedge Capital and managing the BP Pension Fund’s global private equity assets. He has also been part of the investment team at PineBridge and Aviva Investors, where he was responsible for European private equity.

Mark Humphreys

Head of EMEA client solutions Invesco Investment Solutions
Mark Humphreys is responsible for the development of Invesco’s multi-asset offering for its clients in Europe, the Middle East and Africa (EMEA). This includes managing strategic asset allocations as well as developing advisory service lines and outcome-based products. He is a member of Invesco’s investment committee. Having started his investment career at Aon, Humphreys became an investment consultant at Willis Towers Watson before joining Schroders as outsourced chief investment officer.

Martin Collins

Trustee director 20-20 Trustees
Martin Collins has worked in pensions for 30 years. He joined Lloyds Banking Group as a treasury director during the financial crisis, where he saved the bank more than £20bn by implementing a de-risked investment strategy and collateral-led funding plan. Collins also led the in-house pensions investment team and served on the investment sub-committee. He has also led a derivative structuring team at Santander, designing one of the first longevity hedging contracts.

Tom Sumpster

Head of private markets, Phoenix Group Tom Sumpster brought more than 20 years of structured finance experience to Phoenix when he joined in March last year. His previous role was head of infrastructure at Legal & General Investment Management where he worked across equity and debt. A chartered accountant by trade, Sumpster’s previous roles include focusing on infrastructure debt, structuring and underwriting at Royal Bank of Canada. He has also held related positions at BayernLB, Dexia, Santander and PwC.

Roger Mattingly

Trustee director, Ross Trustees
Roger Mattingly chairs several trustee boards and investment sub-committees. A former president of the Society of Pension Professionals, Mattingly has been a member of various industry groups, including the Pensions Regulator’s Stakeholder Advisory Panel and chair of the Pensions & Lifetime Savings Association’s Multi-Employer Defined Benefit Committee.

The debate

What private market assets are in institutional portfolios?

Christian Dobson: We invest across the piece. We aim to build diversified infrastructure, private equity and private credit portfolios over three years. Diversity of theme is key in those portfolios. Private equity, for example, is across buy-outs, special situations, growth and venture. We are also keen on Asia, which we see as a growth market, while technology and healthcare are long-term megatrends where growth is available. Border to Coast also has a climate opportunities sleeve, which invests across private credit, infrastructure and private equity. We see exciting opportunities around cleantech and hydrogen.

Tom Sumpster: We focus on Solvency II-eligible instruments, which are largely investment-grade debt. We invest much of the billions we are responsible for into real assets where we can influence communities and people’s lives in a positive way. In the UK, that means supporting the levelling up agenda. So, affordable housing, waste-to-energy plants and electric vehicle charging are good examples. It is more than just the economic return we can deliver in private markets, but also the social value we can attribute to those instruments. We have other pools of capital. We are allocating mandates for private equity, real estate equity, infrastructure equity and venture capital. Again, we are thinking about local economies and where best we can support industry to thrive. This is different to how insurers used to think, which was awarding mandates to be deployed across public equity and fixed income markets to create balanced portfolios. We put greater emphasis now on how our investments can be impactful.

Martin Collins: The role of private markets has always been a return driver, but it also offers diversification because it allows access to markets you cannot get to through public markets. What has changed for private markets in the past few years has been the increased focus on liquidity. Around 20 years ago you might have assumed that you could invest forever. The growth of buyout transactions and the like means you need to reconsider how much liquidity you have.

Roger Mattingly: The trend is increasingly towards defined contribution (DC). A number of my defined benefit (DB) schemes, through economic circumstances in the past 12 to 18 months, are now better funded compared to the historic deficits that were so prevalent. Suddenly, lock-in periods of seven-plus years have become more challenging if you now believe you could buyout within five years. So, where we have illiquidity, we are asking if it is an acceptable asset for the buyout market. As I say, the trend is towards defined contribution, especially the master trusts.

I chair the Cushon Master Trust trustee board, which has an objective of “net zero now”. By definition, that needs illiquids and we are looking at a potential exposure of up to 15%, focusing on infrastructure, forestry and clean energy. We are conscious of understanding what we are getting into. Fortunately, everyone on our board is a professional trustee. It is a challenge from an educational perspective to take lay trustees along that journey. Private markets are wide ranging and the devil is sometimes in the detail. You need your wits about you when entering into these contracts. Reading 200-page subscription documents is not for the faint hearted.

Mark, what opportunities are you seeing in private markets?

Mark Humphreys: Larger pension schemes, with their in-house resource, have been effective in exploiting the yields you can get above investment-grade credit. They do not have the restrictions Phoenix has as an insurer. Smaller schemes looking at a 10-year exit strategy, need to take care with longer dated assets as they would need to sell them in future at an unknown price. Shorter-dated private credit assets, such as direct lending, infrastructure and real estate debt, have a place in smaller scheme portfolios and can be easily accessed. The yield premium you can get over investment-grade credit can feed through into actuarial assumptions, which can take pressure off sponsors because there would be less reliance on employer contributions. The yield gap is an opportunity for smaller schemes and has the added advantage that a lot of these instruments are floating rate or have frequent re-sets. So, if interest rates rise over time there is an element of protection against that and inflation.

Dan, what are you seeing in private equity?

Dan Aylott: Where we have been directing our clients’ attention has not changed in the past few years. Even through the exceptional times we have lived through with Covid, Brexit and now the war in Ukraine. Despite all that uncertainty, our long-term views have held firm. We have a preference for orienting our clients towards the smaller and lower-middle ends of the private equity market where we see better valuations. There has been a huge amount of money raised, a lot of which is being held by managers at the upper end of the market who are aggressive buyers of the businesses smaller managers invest in.

We have always been big supporters of emerging managers, which is harder to get right, but we are trying to find the next fund which will outperform. That has worked well for our clients. A sector focus is something we have been proponents of for a decade. We collect operating metric data from our managers at the portfolio company level. That has been telling us for a long time that sector-focused managers tend to outperform their generalist counterparts. That is not to say we do not support larger or generalist managers, but this is what we have been focusing on.

Could I challenge the concept of illiquidity? I work with schemes which are on their de-risking path where private equity and venture capital play an important role as the growth engine. Once you have a mature portfolio, it can be a strong cash-cow. I work with schemes which are rationalising their portfolio but in a way that will continue to generate liquidity. Private markets – private equity and venture capital, in particular – can still play a role even as schemes are de-risking.

What returns are you seeing?

Aylott: The dispersion of returns is greatest at the early venture stage. If you get it right, those returns can be strong. Our clients expect to earn mid- to upper-teen internal rates of return on a portfolio level. There is a blend of returns driving that, so you would expect a higher return from your venture portfolio than from your buyout managers, who are generally targeting a two-times return on a fund level.

Joanne Job: Private markets are broad: infrastructure, for example, is not just one asset class. You have core and core-plus strategies, which are fairly conservative with lower returns. Then you have high octane strategies. So, it depends on what level of risk you are comfortable taking.

Anish Butani: There has been a surge of activity in private markets amongst our clients. There are those starting out and those coming back for their third or fourth helping of the asset class. More work is required to help them understand where the gaps are in their portfolio and to fine-tune the mandate. Some investors are looking to integrate climate sensitivity or ESG within infrastructure, private equity, private debt and real estate. Then there are those creating a dedicated sleeve for it.

We are all on a journey as far as ESG is concerned. It is clear that one size does not fit all. Different investors have different beliefs. Being “ESG sensitive” and “impact oriented” are different concepts though these terms can be used interchangeably. We spend a lot of time understanding investors’ beliefs before the implementation process begins. Being carbon sensitive underpins the E in ESG. What about the S and the G? There is a realisation that private market assets have an important role to play in societies, so what broader footprint beyond carbon should these assets have in terms of local engagement with key stakeholders?

Picking up on the illiquidity issue, how big a problem is it?

Dobson: Private markets are as liquid as they have ever been. Once you have a mature and diversified portfolio, distributions will come off the backend to fund your drawdowns. Looking at it on a fund basis, whatever you make of general partners using subscription lines it gives the capital call process more visibility. You know when they are coming up. On the flipside, pricing in the secondary market for blue chips is tight. You can liquidate mature private market portfolios fairly easily. So, it is not as illiquid as people might think and you are still being rewarded for that illiquidity in the returns you are generating above public market assets. You are also accessing assets you cannot access through the public markets.

Butani: Canadian and Australian schemes are fairly mature investors in alternative asset classes. Some are 40% to 50% exposed. It is interesting that many of the Australian plans are defined contribution and are opening offices in London to invest in private markets. The point about illiquidity and private markets is interesting. Some investors who moved into the asset class are not just maintaining their allocations, their exposure is growing larger and larger.

Sumpster: The Australian and Canadian models are interesting because they run two distinct origination strategies. One is direct investing, which gives them more control over their investments. The other is to use best-in-class asset managers to not only produce attractive returns, but to invest in sectors and geographies that complement in house origination capability. And there is such a diverse choice of managers, from sector specialists to generalists. There is a whole sub-set of asset classes out there, with different liquidity profiles needing different approaches and expertise.

Job: The comments on liquidity are important. People want liquidity, but they may not necessarily need it. Sometimes you are given liquidity but do not know what to do with it. So, getting to the bottom of why you need or want liquidity is important.

Collins: I had to wind up a plan a few years ago and we could not sell some assets for 10 months. That is an extreme case, but as a trustee you need to know what illiquidity means for the asset you are going into. Sometimes it is not a genuine issue, sometimes you cannot sell the asset for love nor money and sometimes you have to apply a discount. If the return potential is high, taking a 5% hit and a few months to get out is fine because it will outperform. The challenge for trustees is a faster journey to buyout than expected. That should not be a reason to never invest in anything slightly illiquid, but it has become harder for a trustee to decide what their tolerance for illiquidity is and how to judge that when constructing a portfolio.

Humphreys: It is about having the endgame clearly mapped out. There is a big difference between the large funds, which have multi-decade horizons, and smaller schemes who want to get out as soon as they can but the funding is not there.

Collins: We are seeing billion pound buy-ins that come with one year’s notice. In the past, we planned 10 years ahead. Now, we are getting surprises from improved funding levels, which is making the job harder. That does not rule out illiquid assets. As a trustee you have to understand what illiquidity means, whether you have to exit at a discount or can exit at all. It is not a barrier to investment, but you have to think about it.

Mattingly: From a fiduciary point of view, we have to consider the financial materiality of all this. We have to make sure it is in the members’ best interests to enter into illiquids. The future of private markets, especially in defined contribution, is a platform approach that can create greater liquidity. The opacity of some illiquids creates suspicion and unnerves trustee boards.

So, there is an onus on private market providers to meet us halfway in making themselves more compatible with institutional investors. This means looking at how their charges are structured and being more transparent. We now have the Task Force on Climate-Related Financial Disclosures, but prising data out of private markets is challenging, although, perversely, there is greater influence to make a difference here. There is a close association between the owners of those assets and what they can do with them. They are not one step removed. In terms of liquidity, the perception with defined contribution schemes is that you need daily liquidity. You don’t. Provided that you have a blend of liquid and illiquid assets, of which you cannot go much beyond 15%, your cashflows and liquid assets could provide liquidity for most schemes. It is important to look at this in context.

There is a desire in government to consolidate to create greater mass to invest in private markets. This goes back decades, but it has taken ESG to accelerate it. I chaired a DC conference last summer and we predicted that in 10 years’ time master trusts would manage on average between £25bn and £100bn of assets. If they invest 10% of those assets in private markets, that is a huge wall of money entering the asset class in the next decade.

Dobson: The manager selection decision changes depending on where you are in your scheme’s life. If you are approaching a position where you may need liquidity in your private markets portfolio, that may encourage you to go to the larger funds where there is a better secondary market. I share the view on smaller and lower mid-market managers. There are more value creation and growth levers there, but a secondaries fund will often give a greater discount on emerging managers than a blue chip manager. That may be a factor in your decision, depending on which stage your scheme is at.

Sumpster: If you look at the market makers which have emerged in the past five years, the secondary market fund of fund strategies have been proven to making substantially higher returns than many primary funds. That suggests the liquidity shortfall is being solved and with more secondary market managers arriving, so greater liquidity will be available in private markets. So, we can talk about liquid assets and less liquid assets rather than pure illiquid, which feels like they are buy and hold with no exit opportunity. In reality, within weeks or months you can sell out of performing positions in an active private market.

Collins: There is a related issue for defined contribution markets, which is the lack of daily pricing. There are a lot of private market assets where you do not know what they are worth until you sell them. So, the challenge with defined contribution is, are you pricing them fairly when members allocate their funds?

Mattingly: There is also the charge cap, which is a challenge to squeeze illiquids into.

Collins: ESG is interesting. The most exciting impact investments in the E and the S spaces are made in private markets. With the G you have to be careful. There are more expenses and risks than you have in the public markets. It is worth the hassle because the returns are there along with different opportunities. That is why trustees like private markets, but there are additional risks.

Is it easy to build an ESG portfolio in private markets?

Mattingly: No. The Cushon Master Trust is still constructing that 15% attribution to private markets. On the equity side, which is ESG orientated, we are invested through an index. There is no annual management charge, so the manager gets a cut from the alpha positions they take. That is the only way we can keep the 15% within the charge cap. A lot of due diligence goes into this. Once you have done yours, the platform provider will do theirs.

So, there are layers of due diligence. Coming back to the liabilities. They are reasonably controlled within the DC environment. Within DB, if it is not through a fiduciary manager, you can find that your potential liability exposure is, in some cases, open ended. An investment of £10m could have a liability of £1bn if you are not careful. You have to negotiate and get the side letters in place to mitigate your exposure. With some trustee boards there is an element of ignorance is bliss in that they do not realise what they have entered into.

Humphreys: ESG is a journey in private markets. Different asset classes are at different stages and the data is better in some assets than others. The idea that it is all sweetness and light in public markets is nonsense. There are labelling issues. Then if you include nuclear in Germany they show you the door. If you don’t include it in France, they show you the door. We should not be frightened of grappling with ESG in private markets because we think it is okay in public markets.

Aylott: It is easier to build an ESG portfolio today than it has ever been because of the opportunity set. There is a lot of innovation, a lot of impact being created in the early stages. Managers are focused on ESG and are more aware of what their limited partners expect, what their portfolios are doing and what their employees expect. There is definitely a shift towards being better stewards of capital from an ESG perspective. ESG means different things to different people: from not wanting to do any harm to making a positive impact. The key is defining what it means for you and what you are looking to get out of your portfolio. We work with clients on impact portfolios and those with mature portfolios who want better ESG credentials. Getting managers to look at their portfolios through an ESG lens, to reengineer what they have invested in before is the tricky part. Whereas, if you are starting from scratch today, there is a wealth of opportunities to consider.

Job: We all agree that ESG certainly is a journey. Nonetheless, while private market strategies are all different, they lend themselves well to having ESG considerations built into the investment process. As such, when you are doing a manager selection exercise or a due diligence review, it is important to ascertain, for instance, the role ESG plays in the investment process. That is, whether it is simply a tick box exercise or if it is more important, such as having a veto on investments.

Sumpster: With the billions larger insurers have available we can be impactful in our direct investments and ensure transparency in every investment decision our managers make. Our investment process includes ESG as a key consideration. Phoenix is more than doubling the number of people looking at sustainable investments. This is a team that make up around 10% of the overall asset management team, alongside other ESG focussed individuals operating elsewhere within the Phoenix Group.

If we are going to make the right investments, then ESG is a major driving factor. We need to think about the significant macro and social situations that are happening and how we are investing into them, such as the aging population. We are in the midst of a technological revolution with digital infrastructure, fibre networks, data warehouses along with a material change in the way people move around, powered by themselves, electricity and hydrogen – the changing energy mix we are witnessing.

Capex needs in economies can come in multi, multi billions and large institutions can make businesses behave differently through the size of our investments, voting and exclusions. We are not going to make investments in coal, but we are going to be impactful in this area by investing in renewables. We are giving careful consideration on how to transition our existing portfolios appropriately to support the returns we said we would deliver while exiting socially bad investments for good investments.

Butani: We work with investors who are grappling with making an impact and making a return. The returns from operating offshore wind and solar assets in the UK have decreased from where they were previously. This has led to more innovation amongst managers to invest in newer areas of the market to maintain a double-digit return. Hydrogen and electric vehicle charging are areas where investors can make an impact. Then there is the “levelling up” agenda, which is a laudable objective that involves capital expenditure to build new infrastructure. The return may not come on day one. It takes a while to emerge. Sometimes investors grapple between making an impact and meeting their liquidity requirements. There is a diverse opportunity set out there and there are enough operating and construction assets in the primary and secondary markets for everyone to make the impact they want, in some shape or form.

Dobson: Managers are starting to have a better understanding of ESG and are willing to implement the necessary changes into their processes. We have a climate opportunities portfolio, but ESG is a facet of our core programmes across the piece. We review that for every fund we look at. The quality is getting better.

We will work with managers whose policies, processes and reporting are not at the right standard, so during the due diligence process we put actions in place to drive them to the level we expect. If managers do not have the ambition to get there, we will not work with them. On the private equity side, it is getting better. There are some strong managers in Europe from an ESG perspective in terms of their processes and reporting. The US is further behind. Asia is a little behind Europe, but we have met managers who are keen to drive this forward. So, it is getting better across the board.

How do you select the right private markets manager?

Dobson: It depends on what you are looking for. You have to be clear on what you want from a manager, whether you are keen to focus on a sector, asset class or region. For us, once we have identified what we are looking to select a manager for, it is down to the key aspects on a quantitative and qualitative basis. Performance is one but factoring in what they have done in the past may not show what they can achieve in a different market going forward. Their investment strategy and ESG process are also important. We also run a peer group analysis against other managers in that space comparing how they operate.

Butani: Opacity shrouds the manager selection process in alternative assets. In public markets, you could say that you are dealing with perfect information, but in private markets you are dealing with imperfect information. For instance, in the past year, more of our clients have been interested in inflation sensitivity. Inflation has different impacts on different private market assets, though investors may not be made fully aware of the inflation sensitivity of the strategy they are investing in.

The other challenge is that managers are evolving their strategies. Once they bought operating assets, now they are going into construction and development. So, how do you test their ability to do different things in different areas? Often, we miss the people element. That is key in this industry. How aligned is the team? What is the culture in these firms? How do they work together?

Collins: In private market investments you sometimes give up a lot of control. You are trusting people with your money for five to 10 years and you get back what you get back. One of the most fundamental checks you do is to ensure you have aligned interests with the manager. That is your best protection.

Job: One of the key aspects of investing is doing your due diligence. You need to know how the manager is positioned to deliver what they say they will, what the opportunity set is and understand the key investment and operational risks.

Sumpster: As we represent patient capital, we have to be patient with how we choose our managers. Building relationships is key. Spending time with the individuals who will look after your money is just as important as putting money to work in the first place. You must get it right. Whilst reading and reviewing a subscription agreement you are hoping never to need to return to it again. If the investment is underperforming, the people relationship comes to the fore. Governance, reporting and how transparent an investment manager is with their investors is important to us. We have seen an uptick in reporting quality which in being far more transparent breeds a healthier relationship. It gives an investment manager better opportunities to demonstrate their skills and attract your capital for a second and third time.

Mattingly: The prize for these managers who get it right, considering the expected growth in private market exposure over the next five to 10 years, is huge. Those who stick to their traditional ways will lose out. Going back to ESG and the conundrum between exclusion and engagement, paradoxically it is easier to engage in the private markets than it is through their liquid counterparts.

The other point I would emphasise is the more you become aware of the opportunities and risks, the more you realise it is incredibly complex. For example, wind farms are good from an ESG point of view, but the blades have historically been made from wood which has led to forests in Columbia being decimated. And the Democratic Republic of the Congo is virtually the only country in the world which has a cobalt source. The context of all this is riveting, but incredibly complex. You may think you are doing a fantastic job from a societal point of view, but in the short to medium term there are repercussions for forests in Columbia.

Humphreys: For smaller entities that access is difficult. The good tend to stay good in private markets and they will charge for it. So, if you are big and have the resources to do some of it yourself, whether it’s direct or finding a new manager, you can capture that extra value. If you are small, you do not have that expertise and have to rely on consultants and advisers. There is also the benefit of diversification, so you have a trade-off for the higher costs. When you net these costs off it is still worth it, but it is a hurdle for many smaller pension schemes to clear.

Collins: Diversification is harder to achieve than in the public space where there are index funds. Often the only practical way for small pension funds to access private markets is via fiduciary managers. It is worth the effort, but there is danger of concentration risk for small schemes if they only appoint one or two managers.

There is a drive to get private capital in infrastructure. Is that happening?

Aylott: There is an increased appetite for infrastructure from our clients and capital is flowing into that space.

Sumpster: The Australians and Canadians came in swathes to European infrastructure in the late noughties. Since then, many more international infrastructure investors have entered the market. The private market for infrastructure is thriving. We are seeing a lot of assets changing hands and attractive returns and investments being made on both sides. We still struggle with the old public-private partnership model here in the UK but are enthused on the next style of public/private programme. We have had positive discussions with government representatives, focussed on the UK’s levelling up agenda [internationally Build Back Better] and Solvency II, providing the flexibility to crowd us into infrastructure and to make investors excited about the environment ahead.

We believe greater flexibility should be employed in contracts, that consider a city’s vision and how people want to live, work and play during the next 10 to 15 years. It is investing into real assets where different cashflow streams can attract different investors at different times. Electric vehicles, hydrogen buses, homes with smart technology and waste-to-energy plants to name but a few, there are lots of ways to invest across that city vision and make a positive change to local communities. The moment is now where the public sector is opening up new private market opportunities to institutional investors.

Aylott: We are seeing infrastructure managers raising additional pools of capital that look more like private equity than infrastructure funds. The lines are getting blurred.

Butani: The market is crying out for more investment. Most governments are in large deficits after Covid and infrastructure is high on their agenda. On the other hand, pension funds are looking for predictable cashflows and stable yields. The challenge is trying to align the two by allowing institutional investors to get a fair return on a low volatility basis, whilst allowing the government to encourage more private sector investment. From digitalisation to the energy transition where infrastructure is central to a number of megatrends that are set to dominate over the coming years.

But a lot of the money raised in recent years has targeted existing assets, not building new infrastructure. The PFI [private finance initiative] model worked well but there was an issue with perception of the private sector making an outsized return from taking minimal risk. Finding a balance between private and public sector objectives will therefore be key in unlocking new capital. Expect the private sector to play a greater role in taking ownership of outcomes as part of their overall incentivisation.

Mattingly: There will also be a trend towards national infrastructure spend. Historically, a lot of the investment in UK infrastructure has been by overseas investors. High Speed 1, for example, is owned by the Ontario Teachers’ Pension Fund. Whereas infrastructure exposure by investors in the UK is often overseas. With what is happening in Ukraine, national energy security will dominate infrastructure in the coming years along with sustainable energy.

What other impacts will the war in Ukraine have on the private markets?

Dobson: We look at it three ways: direct impacts, indirect impacts and limited partners. Direct impacts seem to be muted as most private market managers are not exposed. The indirect impact is much more uncertain, as it has added to inflationary concerns and all companies are impacted by increasing energy prices. On the final point, we have asked our funds if they have any Russian limited partners in their investor base. Given the sanctions there is a potential they may not be able to fund capital calls, so does that leave a hole in the fund. The general answer is no because there are not many Russian limited partners in European and US funds. These are the smaller risks that you may not think about, but, as private market investors, we need to.

Humphreys: This is all against a macro environment which has fundamentally changed. Dealing with structurally higher inflation comes back to floating rate re-setting in the fixed income space and private equity investments with a degree of inflation pass through. The future will not look like the past. That applies to all asset classes.

Aylott: In the short term we might see lower deal activity as people work through what the uncertainty means. We have heard from managers that some of the larger transactions in their pipeline have stalled in terms of their execution. Uncertainty tends to make people pause and take stock. But I agree with Christian that the direct impact on portfolios today is minimal. It is the second-order impacts that will take time to filter through and hit portfolios.

Sumpster: The war in Ukraine has accelerated peoples’ focus on having secure sources of energy to rely on. In the UK, nuclear will come more onto the agenda in the near future and there will be further investment in renewables. Certainly, across Europe we will see the renewables agenda accelerate. Inflationary pressures and the cost of living could potentially lead to recessionary concerns. Constantly reviewing portfolios will be required. Investing in index-linked debt in utilities may give rise to some inflation protection. Equally, review your exposure to sectors which are more susceptible to a recession.

Butani: Any decision around inflation needs to include interest rates. You could argue that monetary policy has been too loose for too long. There are two ways you can look at this. Are policymakers going to continue holding their nerve or do they need to start putting rates up because inflation is too high? In most developed economies we are already on an upward trajectory. What does that mean for mortgages and discretionary spend? Will there be a knock-on effect? There is an added layer of nuance and uncertainty which may make investors watch and wait when it comes to executing deals.

What are the supply and demand metrics like in private debt?

Humphreys: We publish a dashboard twice a year. We have talked about liquidity and it being easier in public markets, but we would say that it is comparable to where it has been in the recent past in the margins you are getting over the public equivalents. We do not see overheating in private credit. In private equity you have to be more discerning, but the margins in private debt, relative to the forward-looking terms of developed market sovereign bonds and investment-grade credit, are fairly robust.

What is your outlook for the private markets?

Mattingly: There will be exponential growth. The hurdles to overcome from a trustee governance perspective are understanding – especially where you have non-professional trustees – fees and charge cap tensions. The contexts of this are government policy, the desire for consolidation, the desire to diversify and the desire to get more involved in ESG underlying assets, which all create potential exponential growth over the next three to five years.

Aylott: Private markets have demonstrated over decades that they can produce outsized returns. That has been through periods of multiple corrections and dislocations in the market, so this is not any different. The market is continuing to grow and expand. The types of strategies investors can access is growing. I do not see that changing. In fact, times of dislocation often create opportunities. Technology will increasingly play a role. It is more horizontal than vertical in terms of it touching every sector. It will continue to be part of the solution, so I see it growing and the opportunity set being there. Returns have demonstrated over time to be strong if done correctly, which is key.

Sumpster: There are exciting times ahead. Private markets will continue to grow and the investment opportunities will diversify further. Attractive returns continue to be seen. But what we are gaining as the asset class emerges is greater transparency. The better your understanding of your investments, the more you can relate your brand to certain investment strategies.

In public markets, whilst you get the benefits of liquidity, in many circumstances there is greater information available to investors in private markets. It will continue to be a growing asset class across equity and debt where we can help make investments that change people’s lives and communities for the better.

Job: Also, as investors get more familiar with the asset class it will lose some of its mystique. While I do not see it becoming mainstream in the immediate future, it should continue to grow in institutional investors’ portfolios given, for example, its diversification benefits.

Mattingly: The end user of our efforts, the member, wants ESG-orientated investments. They do not want that at the expense of returns, so we have a financial materiality duty. There is another context in terms of pressure, not just from the government or the physical risks of climate change but members like the idea of their assets doing good.

Butani: While the outlook is strong there may be a few bumps in the road. It has been an exceptional decade, with low interest rates and inflation, economic growth and a healthy stock market, which has created capacity for greater allocations towards private markets. There have been incredibly loose monetary policy conditions as well. In the near term, there may be some turbulence but the overall outlook should be strong. The quality of data metrics continues to improve, which will help investors understand the role of private markets better and arguably make them stronger.

Thirdly, if we had this conversation in three or four years’ time, will private wealth have a greater role in allocating capital to private markets? If you look at the trillions held in private wealth portfolios, just 1% of that would increase the size of the private markets by almost 10%. We are starting to see signs of the private markets industry democratising access to private wealth investors. Expect them to have a more visible presence at the table.

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