Investors urged to ‘recalibrate’ return expectations for private markets
This is amid public market outperformance and increased scepticism: panellists
[SINGAPORE] While slower divestments and liquidity issues present challenges in private equity markets, they are also creating opportunities in secondary markets and co-investments.
Geok Wen Ting, head of Asia private equity at Mercer Alternatives, highlighted that the sluggish pace of divestments has trapped net asset value (NAV), but liquidity is fuelling growth in secondary market activity.
“Because fundraising is difficult, we are seeing more managers use co-investments as a carrot, so... secondaries and co-investment volume” are rising, she said, referring to secondary private equity markets.
She believes these two transaction types can boost portfolios and enhance returns. “It’s not all doom and gloom,” she added, noting that these trends are moving in a positive direction.
She was speaking on a panel titled “Global Private Markets: Risk, Returns, and the Next Phase of Growth” on Wednesday (Oct 1), as part of the Milken Institute’s three-day Asia Summit held at the Four Seasons Hotel Singapore.
Shifting expectations
While Geok’s fellow panellists emphasised the significant growth of private markets over the past year, they also said that expectations must be adjusted.
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Globally, private markets’ NAV currently stands at around US$15 trillion, and projected to reach US$20 trillion by 2029, noted Yup S Kim, chief investment officer (CIO) at Texas Municipal Retirement System.
“If you look at recent returns (over) the past two years, public markets have dramatically outperformed private markets, and it’s well known that for the past 15 years, there have been incredible tailwinds,” he added.
However, he cautioned that investors should “recalibrate their return expectations for private markets”.
This is because achieving returns the same as those in the last 15 years will require twice the effort, he explained, especially because median private equity returns have declined from about 17 per cent to a range of 12 to 13 per cent today.
Geeta Kapadia, CIO at Fordham University, added that this amid a notable shift in return expectations for private markets.
“When we think about mid-double-digit returns for private equity, and ideally 10-plus per cent returns for private credit, we look at those with a little scepticism now,” she said.
Given the strong performance of public markets over the past few years, she finds it difficult to justify these types of returns, and necessary to modulate expectations.
Well-rounded strategy
In response, some investors are adopting a more diversified approach.
For instance, the private market portfolio of Kumpulan Wang Persaraan (Kwap) – Malaysia’s pension fund for public employees – is designed to balance investments between North America, Europe and Asia, said its CIO Hazman Hilmi Sallahuddin.
This ensures a well-rounded strategy amid shifting market dynamics, he added, noting that while some of Asia’s private markets are maturing, the scene is generally “very nascent, and this is where we see that there is an opportunity for us to do something”.
Recently, Kwap launched a programme in collaboration with 12 global and 12 local general partners (GPs). Under this, 40 per cent of investments must be made in Malaysia, with the remaining 60 per cent to be invested wherever the GPs choose.
Hazman called the initiative a “part of our catalytic effort to develop the ecosystem in South-east Asia”.
He sees this as a strategic move, with demographic shifts indicating that nine out of 10 people will live within Asia and Africa in 75 years, and the fact that half of the global population already resides in Asia.
“If you take a long-term lens, (Asia) will be the market in the future, so we want to take a step in betting on that,” he said.
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