Private markets offer growth opportunity for investors and entrepreneurs

The global economy is under extreme pressure. Geopolitical tensions have combined with, and precipitated, the highest level of inflation many countries have seen in decades. This ongoing volatility is evident in the public capital markets?— and has been for some time. While private markets are not exempt from these forces, there has never really been a better time to be a private company when looking at the range of avenues of capital to fund the growth journey and transformation.

There is still a significant amount of untapped capital in private markets— and this “dry powder” is often essential to the success of entrepreneurial ventures, many of which are committed to solving real-world challenges. Private markets offer many routes to investors so diversification will be important to keep in mind.

It’s no surprise that investors have been shifting from public to private markets — they want to avoid the volatility inherent in public markets, and they have the patience to ride through different cycles. With more capital than ever being placed in private equity, venture capital and private credit, EY teams estimate show that more than $19t is now invested in private markets. In fact, private capital assets under management have nearly tripled over the past decade.

Private markets have also proved more resilient to fluctuations in sentiment and external market conditions, both political and economic. In the near term, economic growth is slowing, and inflation is rising. Yet, private capital growth is likely to continue — or even accelerate. Recent industry estimates suggest the growth in private markets could be as high as two times or even three times over the next five years.

So, what’s driving this rapid growth? It’s a variety of factors:

• ?Investors are diversifying their assets and searching for higher returns.
• ?Bespoke fund and alternative asset choices continue to expand.
• There are more high-net worth individuals than ever.

Furthermore, as private capital markets have become bigger and more liquid, many successful companies have opted to stay private or go private. IPOs have declined over the past 20 years because they are so expensive. In 1980, the median age of a US company at its IPO was six years, whereas in 2021 the median age was 11.

Ongoing growth drivers

Over the next few years, family offices and private equity are expected to continue propelling the growth of private capital.

Family offices

A massive intergenerational transfer of wealth is expected through 2030. Among high-net worth individuals — those with wealth of over $5m — more than $18t of wealth is expected to be passed between generations. This has led to a boom in the creation of family offices.

There are now at least 10,000 family offices globally, managing and investing the wealth of some of the world’s wealthiest families. Family offices now have over $7t of assets under management, and more than half of them invest directly. This megatrend will likely mean more investment in alternative assets.

Private equity

Private equity is set to be another long-term growth driver, building on remarkable growth in recent years. Institutional investors are attracted by the higher yields and relatively stable returns that private capital can offer.

Globally, 20,000 companies are owned by institutional PE funds and the number of funds has more than quadrupled since 2007. Private equity has nearly $4t in assets under management and an estimate $1.5t of unallocated dry powder waiting to be invested. In 2021, PE investment broke all records, with over $1t invested globally.

From where I sit, this trend toward the private markets is not a short-term phenomenon, and the dynamics that have driven growth over the past couple of decades are very likely to continue to do so. The growth of private capital and the significant levels of dry powder in play present tremendous opportunities globally for investors, entrepreneurs and the game-changers of tomorrow. It promises to be the fuel that propels many of the most successful companies to new heights, and I’m really excited about its future.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.