Evening Brief – 03.29.23

In private markets, determining which direction the wind is gusting can be taxing as these markets aren’t prone to the same daily twists as public markets. That’s why it’s critical to pay attention to relevant data as it becomes available.

A recent study by State Street of nearly 500 asset managers and private market investors found that private equity is expected to remain the top alternative asset class for new investments over the next two or three years, while 68% of institutional investors “will continue to grow private markets allocations in line with current targets.”

The data suggests most investors remain bullish on private markets, despite stark headwinds, including rising interest rates, sticky inflation prints, and a reset in stock valuations. In fact, there seems to be an increasing dialogue of private market investors questioning the opinion that a recession is inevitable or even likely in 2023.

Private equity investors have reason to remain optimistic, as the best returns have historically followed periods of economic turbulence. According to a report by Bain Consulting, investors have earned exceptional internal rates of return (IRR) in years following a recession. After the dot-com bubble, funds generated a median IRR of 25% in 2001, 40% in 2002, and 47% in 2003. Following the Global Financial Crisis in 2009, they posted an IRR of 24%.

Despite market gyrations, private markets have generated solid returns over the last 15 years, with many of the strongest years arising from recessionary periods. Institutional investors, therefore, will likely continue to allocate to private markets to gain exposure to what may be some of the best years to come.