Amid global inflationary pressures, investors could benefit from leaning towards private markets for better future returns instead of sticking to the traditional 60:40 portfolio,, according to a report.
Touching upon the debacle traditional portfolios experienced in 2022, the CIO Private Markets Perspectives & Allocations Series report by PM Alpha recommended a 10%-60% portfolio allocation to private markets for wealth managers. This investment advice comes against the current backdrop of the falling numbers of listed companies and the recession risks faced by investors across North America and Europe.
Multiple macro factors emerged as the key drivers of private market allocation in 2023. These include the drying up of corporate financing, retracing of corporate expenditure, consumer liquidity squeeze, the rising cost of living, search for alternative sources of inflation-protected yields and others.
The repricing of assets across sectors in the next 24-36 months makes private markets an optimal entry point for investors, the report highlighted. Findings suggest this would provide opportunities for selective investors to unlock value trades and benefit from their repositioning towards medium-term recovery.
According to the analysis, markets witnessed a near halving of the number of publicly listed US companies since the late 1990s, with companies staying private for longer, coupled with greater value creation on pre-initial public offering.
Private markets are also well positioned to capture secular—or non-economically sensitive—trends across fields like corporate technology, healthcare, consumer digitalisation and energy transition before they are accessible through listed stock markets.
Forecasting secular trends for 2023, PM Alpha anticipated a strong wave of M&A and serial buy-build plays across all B2B technology market verticals. Exit opportunities for longer-dated, closed-end private market funds holding clean energy assets over this period could also become favourable.
The research recommended investors hedge short-term volatility and risks to the downside while rebalancing portfolios towards longer-dated, higher-yielding investments. Market recovery, powered by secular trends, is anticipated across main markets roughly during the backend of 2023 to early 2024.
Alexis Weber, CIO and founder, PM Alpha, said: “Our (re)balancing act intends to pivot portfolios towards longer-dated investments, specifically concentrated on the core macro drivers impacting portfolios today. This includes balancing them with fundamental secular trends expected to drive growth beyond current market volatility.”
As committed capital is spent by private market managers more gradually and locked up for a period, it enables them to exploit market dislocations and select the best potential growth opportunities.
Tom Douie, CEO and founder, PM Alpha, added: “A majority of economic activities and commercial revenues generated by private companies indicate that the opportunity set for investors are greater than those offered by public markets.”
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