Higher investor demand for private assets will bring with it a return of the “human factor” to investment management and a more sustainable risk-return ratio, according to experts.
The demand will also create a greater link between investment and the real economy – especially in terms of real estate and infrastructure – and will help companies reach their net zero targets.
These were the opinions voiced by alternative asset managers and asset owners at the European Investment Summit held by Societe Generale in Paris.
The summit heard that the rise of private markets comes at a time of fundamental change in the global economy, with interest rates on the rise and a retreat from globalisation meaning that wealth creation will be based more on resilience.
Headwinds facing private markets include the conflict in Ukraine and widespread inflation that will lead to a slower rate of growth. But, said Thomas Friedberger, CEO and co-CIO of Paris-based alternative asset manager Tikehau Investment Management, growth will be more sustainable and linked to the real economy – two factors that should be welcomed.
“It is obvious to me that the economic model we have used since the end of World War II based on infinite short-term growth is not sustainable,” said Friedberger. “It has had a negative effect on biodiversity, climate change and wealth inequality and created financial bubbles.”
In addition to more sustainable growth and an end to financial bubbles, there will be a return of the human factor to private market investing with returns driven more by alpha than beta and value creation more dependent on stock picking than asset allocation, said Friedberger.
This will have competitive implications for firms, he said. “For asset managers, only the most disciplined will out-perform the market. You need to be plugged into local ecosystems, have offices everywhere you invest, and the alignment of interests will be much more important than before. And attention to detail will make a lot of difference.”
Friedberger’s views and sense of optimism was shared by a number of other private-markets investors. That said, there is a mixed picture when it comes to asking which of the various asset classes within the private sphere will benefit the most from an estimated $2 trillion in dry powder destined for the private markets.
Infrastructure is seen by many as a natural hedge for the current market conditions. Private equity is also seen as attractive.
The credit market also holds some opportunities for non-bank participants. But it is the impact of private market investments on the real economy that could prove to be the most effective driver of inflows, according to Alexandre Pieyre, head of EDF Invest, the private equity arm of the French energy company.
“It is about climate change – our investments in infrastructure and real estate have an impact, especially where we are refurbishing buildings with green technology – converting brown assets to greener assets in order to meet Paris Agreement targets,” said Pieyre.
This is also helping to attract institutional investors. In addition, more companies are going private for longer, it allows them to grow without the short-term pressure of quarterly earnings. For example, the number of listed companies in the US has halved since the collapse of Lehman Brothers and the start of the 2008 financial crisis.
Private markets are not only here to stay, said Paolo Rizzuti, head of private markets and general manager of the Italian private banking group Credem Banc, but growth will accelerate over the next decade at the expense of listed markets.
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