Key Reasons Why Investor Interest in Private Markets Continues to Grow
nvestor interest and participation in private markets continues to grow. Indeed, investors continue to increase exposure to private markets, including private equity and private credit, at the expense of their public market equity and fixed income allocations. In fact, CEM Benchmarking noted there was an average allocation to private markets of 18.5% in 2020, which represents an increase of nearly 5% since 2012.¹ So, what is driving this investor behavior?
Performance is certainly one factor. For example, buyout returns have outperformed global equities on a public market equivalent basis in every one of the past 20 vintage years. In addition, private credit has outperformed leveraged loans on a public market equivalent basis in each vintage year over the last 20.²
Beyond performance, however, we believe there are also several other critical reasons why investors are attracted to private markets. In this article, we'll outline these reasons and highlight—from a total portfolio perspective—what we believe you are missing out on by not participating in private markets investments. And we'll share data that shows which types of investors are underexposed to this vital sector.
Private markets provides a significantly larger investable opportunity set
Today, private markets are a widely accepted part of an investor's strategic asset allocation. Perhaps one of the most important reasons why this is the case is that the investable opportunity set is significantly greater than what is available in the public sphere. Moreover, investors may be surprised to learn just how big the difference is. For example, today there are more than 95,000 private companies globally that have annual revenues over $100 million, versus approximately 10,000 public companies with the same revenues.3 By this metric, and as the chart below shows, the investable universe of private companies is some 850% bigger than the public markets. Given the sheer magnitude of the difference, we believe it is too large for investors to ignore.
In addition, it should also be noted that the number of publicly traded companies continues to shrink. In 2020 there were approximately 3,600 public companies in the U.S., which is approximately 50% less than there were in 1996 and three-quarters as many as there were in 1976.⁴