Although the Public Markets rebound since the depths of the coronavirus crisis has lifted the value of assets they hold, investors believe the outlook for further gains now looks limited in almost all leading bond and equity markets, given record or near-record valuations. As a result, many are turning to private equity, venture capital, infrastructure, real estate and direct lending — strategies often grouped together as “private capital”, as they invest in opaque assets that do not trade on public exchange — to amplify their returns.
Money is being raised faster than it can be invested. Fundraising has been so strong that the five listed US alternative investment firms alone have “dry powder” — money committed by investors but not yet deployed — of about $440bn, according to Goldman Sachs. That is the highest on record, and twice their firepower four years ago.
But can investors have too much of a good thing? Too much capital chasing too few opportunities leads to investment decisions that blow back. And how good are these managers at delivering real returns for investors? One paper suggests that between 2006 - 2015, the PE industry had taken $230bn in performance fees to generate returns equivalent to those achieved through lost cost index trackers.
The biggest listed US private capital companies have more than tripled in value since the depths of last year’s market sell-off, as investors seek to benefit from the hefty fees they rake in from the boom in unlisted assets. The combined market value of Blackstone, KKR, Carlyle, Apollo and Ares has ballooned from a March 2020 low of $80bn to about $252bn this year, and private equity chiefs sounded an ebullient tone on earnings calls with analysts this summer. “We are fortunate to be in a growth business,” said Marc Rowan, chief executive of Apollo Global Management. “Almost every day, the business gets better. The trends in the business are overwhelmingly favourable.”