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Investors flock to private markets in search of profits

Historically low interest rates and high stock valuations are prompting a return of hungry investors to the private market, with non-publicly listed assets under management expected to rise. 60% in the period 2020-2025.

Alternatives — an unlisted portfolio of assets that includes private equity, private debt, hedge funds, real estate, infrastructure and natural resources — is set to pass. $17 billion in AUM over the next four years. According to data provider Preqin, private capital and private debt will be the main drivers of this growth.

“Due to lower interest rates, clients are willing to give up some liquidity in order to receive higher returns,” said Cyril Marie, chief financial officer and head of strategy at Natixis Investment Managers.

This boom in demand has spurred consolidation in the sector, including buy Oak Hill Advisors by Baltimore-based asset manager, T Rowe Price.

Private industry has grown in excess of 7 billion dollars in the past few years. Growth is expected to be strongest in Asia, with Preqin citing low penetration rates and fast GDP growth as attractive factors.

The graph shows the growth of alternative assets under management

Preqin’s forecasting model is based on historical AUM data across asset classes and regions, along with fundraising and trading, and various macroeconomic data. The data provider says its 2025 estimate is supported by questionnaires asking about the expectations and intentions of investors and fund managers.

Less volatility and uncertainty in the private market may also appeal to investors. “With a listed asset, the day after the lockdown you have lost 40%, whereas with an unlisted asset it is less volatile so the perception of risk is smaller,” said Natixis’ Marie, who said. added that “in fact, the risks are essentially the same”.

Bruce Hamilton, an analyst at Morgan Stanley, said that even wealthy investors with a traditionally low allocation of private wealth are planning to add to their positions, in part because ” product innovation and new distribution platforms”.

Private equity and private debt are expected to grow by 15.6% and 11.4% a year, respectively, through 2025. Other alternatives are forecast to grow 5% or less. each year. According to consulting firm McKinsey, private equity has been the strongest performing and least volatile alternative asset class since 2008.

According to JPMorgan, private debt has evolved “from a niche product” earlier this century to “the mainstream.” Two-thirds of its assets are invested in North America and a third in Europe.

Nikolaos Panigirtzoglou, an analyst at JPMorgan, said that one of the reasons for the rise in private debt in Europe was that banks were “stepping back on loan creation” after the euro debt crisis, facilitating Private debt markets such as direct lending funds developed.

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