If good pain exists, private markets are feeling it

This article was published in partnership with Blue Owl Capital.

This article was published in partnership with Blue Owl Capital.

After a formative, largely unsupervised childhood, private markets are finally adulting, which reflects the growing size and importance of the sector, writes James Clarke, senior managing director – global head of institutional capital at Blue Owl Capital.

Private asset managers are facing increased scrutiny and pressure from institutional clients to deliver value and it’s about time.

Those of us who grew up in public markets, and those who are still there, have had many nightmares about being hauled into a client’s office and fired over a dip in performance.

By comparison, private asset managers have enjoyed relative peace and harmony.

Finally, their sleep is being disturbed. As private market managers grow organically and through M&A, shed their boutique image, and morph into giant investment management platforms, they are being held to the same standards as their public market counterparts. No one is exempt from the firing line.

This is a positive development that reflects the size, scale and maturation of private markets, and the increasingly important role they play in portfolios.

They are no longer investment management’s poor cousin, accounting for around 30 of institutional portfolios. This compares to around 10 per cent a couple of decades ago.

Another positive development is that private asset managers are being judged not only against their peers but against other asset classes.

Until recently, they have largely managed to escape comparison, due to the disparity of strategies and returns, their lack of liquidity and transparency, and the absence of standardised reporting.

Ironically, this shift from absolute to relative performance creates a more even playing field, recognising that everything and everyone should be judged on their risk-return profile.

When it comes to performance, private assets are currently holding their own, and this is expected to continue, but greater scrutiny and comparison can only be a good thing for investors and members.

Arguably, the most telling signs that private markets are growing up is that investing in the sector has moved from being a tactical asset allocation decision to a strategic asset allocation decision, across all private asset types.

Furthermore, private assets are not just a capital appreciation play but a capital preservation and income generation strategy.

One example and where the shift from TAA to SAA is most evident is in direct lending, where global private credit assets under management have quadrupled to $2.1 trillion in the past decade.

With the banks retreating from segments of the lending market due to regulatory capital constraints and risk appetite changes, and more people entering retirement, demand for global private credit has led to an exponentially bigger opportunity set.

As a result, private credit has become a key part of most institutional investors’ defensive portfolios. Not only can it add resilience and diversification benefits, but it can also be a strong source of income.

This is a meaningful change, given that not that long ago allocations to private credit were small and funded by a portfolio’s alternatives bucket. At times, if credit spreads were tight or the market appeared distressed, funds could make tactical moves to adjust their allocation.

As more members start drawing a pension, and the amount of money leaving superannuation and pension funds begins to eclipse contributions, private credit and other private market asset classes will become more essential for delivering long-term income and stability.

All these shifts and changes point to an asset class that is growing and maturing. Taking a total portfolio approach, public and private markets both have a critical role to play in serving the needs of investors.