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Public Equity Investors are Increasing Allocations in the Private Markets, Survey Finds

July 24, 2019, 09:00 AM
Filed Under: Industry News

PitchBook, a data provider for the private and public equity markets, released the findings of a new survey report, Private Markets: A Decade of Growth, which documents the proliferation of the private capital markets over the last fifteen years and explores the current intersection of the public and private markets. The report incorporates data from a survey of 101 institutional limited partners and equity investment managers conducted in Q2 2019, examining changes to asset allocation strategies in response to private market growth. According to the findings, two-thirds of respondents plan to increase allocations in the private markets over the next five years as a result of the maturation of the private markets and consistent outperformance. Since 2004, the private markets have outperformed the public markets, with the top 25% of PE and VC managers outperforming by more than five times.

"As the private markets have steadily grown to their current record levels, they're starting to play a much larger role in the global markets," said Adley Bowden, VP of research and analysis at PitchBook. "Now more than ever, we're seeing companies and investors navigate between the private and public markets as they seek out the optimal market for operating and investment. As we found in our survey, it's beginning to impact asset allocation strategies for public investors seeking higher returns. We expect private markets to continue proliferating and for the relationship between public and private markets to increasingly tighten."

Over the last decade, $10.7 trillion (including equity and debt) has been invested into companies by private equity and venture capital investors globally, which has produced a record number of private companies that are privately-backed (PE or VC backed). In the US, there are 13,695 privately-backed companies compared to 4,397 publicly listed companies today – down from 6,917 in 2000. This steady growth has impacted where investable opportunities are located and created increased convergence with the public markets. One example of convergence is the IPO market, whereby the private markets serve as a pipeline of companies transitioning to the public markets. Currently, 44% of companies listed on NASDAQ were formerly PE or VC backed. Other points of intersection include, disruption of public companies in established industries from agile private companies, the uptick in take-private transactions and increased acquisitions of private companies.

To understand how asset allocators and public equity investment managers are responding to the growth of the private markets, PitchBook administered a survey to this audience in Q2 2019. According to the findings, public market investors are paying significant attention to the private markets. Key findings include:

  • Over half of survey respondents indicated they spend between 11% and 25% of their research process evaluating disruption risks from privately-held startups and new technologies.
  • Two thirds (66%) of respondents viewed private companies to be better positioned to benefit from technological advancements – another reason why public market investors are paying attention to the private markets.
  • 61% of respondents view understanding investment trends and capital flows within the private markets more broadly is important. 42% listed it as very or extremely important.
  • Of limited partners surveyed, 66% said they would be increasing, slightly or significantly, their allocations as a percentage of their AUM to private market strategies (PE, VC direct investing) over the next five years.
  • Higher potential returns than the public markets, diversification benefits and increasing amount of attractive investment opportunities were the top three reasons why institutional investors believe the private markets have continued to attract hundreds of billions of capital.

To download the full report and read more about the survey methodology, click here.

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