The growth of private markets has so far been primarily driven by the demand from institutional investors such as sovereign wealth funds, insurers, or pension funds, among others. However, various experts from M&G Investments note the expansion of the topics of conversation around private markets, as well as a greater interest in different forms of access to them, such as through impact strategies. “There are three major changes in this market that are too significant to be ignored: the size of the opportunity set, the increase in the number of geographies, and the very definition of what private assets are, which has broadened,” says Ciaran Mulligan, CIO of Investment Management and Oversight and co-director of M&G Life’s Treasury and Investment office.
Opportunities by Segments
The global financial crisis marked a turning point for private markets from a credit origination perspective, transferring much of the prominence held by banks to more agile players in the market. Emmanuel Deblanc, CIO of Private Markets at M&G Investments, states that to operate in private markets, “size and having a good name are important, because they inspire confidence in banks, which has a multiplier effect in making banks feel comfortable with underwriting assets.”
The expert also notes that the investment ecosystem has evolved, exemplified by the presence of many infrastructure funds now having their own financing teams, enabling them to attract flows beyond banking. He also observes that the role of banks has evolved, now acting more as facilitators than in the past, advising on transactions without necessarily taking positions on their balance sheets.
Deblanc adds that the emergence of large structural investment themes is also affecting this investment universe, specifically citing the climate transition: “It will provide key growth for this asset class, allowing access to thematic investments in energy and social infrastructure.” “Investments in energy transition open up a significant investment charge by risk and volume; we are seeing much faster growth than expected five years ago, accelerated by the geopolitical events of recent years,” adds the expert.
Regarding private credit, Deblanc states that the investment universe has expanded and matured significantly, though it remains an “inefficient, very complex market where understanding the local context is necessary.” Ciaran Mulligan adds to these observations the increase in capabilities in Europe and, to a lesser extent, in emerging markets, where professional investors like M&G are beginning to consider the possibilities presented by this universe through leveraged loans, direct lending, and corporate debt. The expert clarifies that the investment horizon is crucial for investing in this asset class, with a recommended duration of 15 to 25 years. With this in mind, operations “will take into account that debt levels will increase in the future.” Specifically for M&G, the private credit investment strategy focuses on companies with revenues between 40 and 100 million euros, considering it a segment with less activity.
Structured credit is the last segment Deblanc cites, particularly in the ABS segment. The expert recalls that this is a market with “fewer players because it is a complex asset in a closed market,” but in return, it offers the possibility of a differential with additional points of profitability. The expert observes that capital requirements have increased, a trend accelerated by the collapse of Silicon Valley Bank, opening new opportunities for investors in “a very sophisticated market segment.”
M&G Investments manages 84 billion euros in private assets, with the largest segment being real estate, with over 39 billion.
A Transition Phase
Deblanc does not see systemic risk in private markets and considers the current environment, where global GDP will move between 2% and 3% and there is no excess demand, to be benign for this investment universe. That said, he notes that the market is undergoing a transition phase, as the large gap that used to exist between buyers and sellers is narrowing. This is a trend he believes will accelerate from the fourth quarter of 2024, leading to increased dispersion among managers: “Good managers will become more visible,” he concluded.
Neal Brooks, Global Head of Product and Distribution at M&G Investments, admits that the growth of the private assets market has slowed in recent months due to the ‘higher for longer’ environment, but he expects demand to remain to the point that he anticipates the total investment universe to reach 13 trillion dollars by 2028, primarily in three areas: infrastructure, private equity, and private debt. Brooks speaks of growing appetite from clients, but also from governments and regulators, which he believes will open up markets by allowing access to a larger number of companies. This growth, according to the expert, will occur at the expense of other vehicles traditionally used to gain exposure to these markets, such as hedge funds.
Finally, Brooks highlighted the importance of the current moment in terms of developing product strategies that are accessible to a wide range of investors, noting that currently, 80% of companies with over 100 billion in revenue are not publicly traded. This is compounded by the increasing trend of public companies being delisted to become private again. M&G is advancing in developing new structures to facilitate this access, for example, through the launch of ELTIFs. “Financial education is very important; clients themselves are aware that they need it to help them allocate their capital correctly,” Brooks concluded.