Private market investments are becoming increasingly attractive. They can offer investors with long-term horizons interesting risk-return profiles and diversification effects.
By Kirsten Bode, Co-Head Private Debt Pan-European at Muzinich & Co.
Investors remain under great pressure. Weak economic growth, volatile markets, and a persistently low-interest-rate environment make it difficult to achieve targeted returns. In view of the persistently low returns likely to be generated by certain traditional asset classes, investors are increasingly recognizing the opportunities offered by private market investments.
For many institutional investors, alternative assets such as private equity, infrastructure, and private debt represent a potential route to secure new sources of earnings and are increasingly becoming a fundamental component of their portfolios.
Stable Earnings and Diversification
Within a risk/return context, in times of low or even negative interest rates, private market investments can offer investors attractive investment opportunities that are characterized by stable earnings and low price fluctuations. Due to the lack of liquidity, investors receive an illiquidity premium relative to corporate bonds.
This premium is an additional source of returns for investors, who demand on account of the long holding period – up to seven years – of financial assets that are infrequently traded. Because the correlation to other asset classes such as equities and bonds is low, a private market investment such as private debt can help to diversify a portfolio.
Growing Demand
As a result of interest rates remaining negative or very low for the foreseeable future, demand for private market investments is likely to continue to grow over the coming years. It is within this context that the global private equity market is hitting record after record.
According to estimates, financial investors currently have free funds of more than one trillion dollars at their disposal. According to the data provider Preqin, private capital investments worldwide have risen to a total of six trillion dollars, of which around $750 billion is invested in private debt funds – in 2007, around $200 billion was allocated to such funds. Preqin forecasts that the global private debt market itself will grow to $1.4 trillion by 2023.
Rely on Experienced Experts
Following the financial crisis, the European private debt market, in particular, has become an integral part of the fixed income landscape. Bank loans to companies are declining, on account of regulatory requirements such as Basel III. Small and medium-sized European companies (SME) in particular, as well as companies without an investment-grade rating, are feeling the effects of more restrictive lending by banks.
These companies are increasingly looking for other options when it comes to financing. This calls for reliable financing partners who are able to meet the necessary capital requirements of European SMEs over the long term.
Local Presence
When investing in private market assets of all kinds, investors should choose experienced industry professionals, as investments of this nature are more complex than traditional fixed-income investments and have limited liquidity.
Successful and competitive providers of private market investments have, for example, a local presence, knowledge of the local business culture, language and legal system in the respective market. This specialist focus is the key to a successful investment in private market assets – and ultimately to higher returns for investors.
Kirsten Bode has been Co-Head Private Debt Pan-European at Muzinich & Co. since 2015. She has 21 years of private market experience. Kirsten graduated from ESB Reutlingen and Middlesex University London with a B.A. (Hon) in European Business Administration.
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