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April 13, 2022

An Evolving Private Markets Landscape

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April 13, 2022

An Evolving Private Markets Landscape

Insight Article

An Evolving Private Markets Landscape

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April 13, 2022


Morgan Stanley’s house view on the global economy is constructive but recognizes that investment returns from traditional asset classes may be potentially more difficult to come by than in the more recent past. Public markets have delivered remarkable performance over the past few years, but we expect that returns may be lower and volatility higher going forward. It is no surprise therefore that the interest in Alternatives and Private Markets continues to grow.

Of course, Alternatives and Private Markets are not homogeneous and offer a diverse set of investment opportunities with varying return and risk profiles.1 Within the space, we see several changes brought about by shifting market dynamics, through product design and innovation, and even changes in investor priorities and conscience. In the following article, we discuss some of these dynamics which we believe may provide attractive investment opportunities and investors should be aware of.

Private Equity – Changing Secondary Market Dynamics

Private equity represents approximately 11% of the average portfolio allocations. Despite almost tripling in size since the mid-2000s (see Display 1), one could argue that this level of adoption still appears below the optimal exposure given the asset class’s attractive performance. Increasing duration and the associated illiquidity remain key reasons why this allocation gap persists. However, there are solutions available within the private equity industry to check, or reverse, this upward trend in duration and allay investors’ concerns about increasing their allocation to the relatively long holding periods.

Display 1
Secondaries Volume vs. PE Unrealized NAV ($B)

Source: Preqin, data as of 31 March 2022


In the early 2000s, the secondary market was primarily a tool for large limited partners (“LPs”), such as endowments, to obtain liquidity for their portfolios. However, we are witnessing a significant shift in the use of the secondary market and attitudes about the sector have shifted tremendously in the past decade. These markets are no longer viewed solely as vehicles for LPs to provide liquidity. Rather, they have evolved to enable complex general partner (“GP”)- led restructurings of mature funds and become an important part of the strategy for many private equity and venture capital funds.2

GPs have a significant amount of capital locked up in funds. Along with an increased volume of, and narrowing spreads in, secondary markets, longer holding periods have led to a huge growth in GP-led secondaries. These transactions now represent over 50% of the secondary market transactions (Display 2). The motivations for GP-led deals are different from traditional LP secondaries. Rather than focusing on liquidity, GPs use secondaries as an avenue to preserve the assets they want to maintain while addressing the needs of their investors. Thus, when a GP has an asset that the fund partners want to keep owning but is feeling pressure to return capital to its LPs, using a secondary with a continuation fund is an attractive option while it may provide investors with an interesting set of attractive investments. This solution may allow new investors to gain access to carefully selected high quality assets, with revised favorable terms, in deals with a shorter duration, potential for compelling IRRs and less of a j-curve (Display 3).

Display 2
Annual Transaction Volume ($B)

Source: Global Secondary Market Review, Jefferies, January 2022

Display 3
Potentially Beneficial Solution For All Parties Involved

For illustrative purposes only. The statements herein reflect our views and opinions as of the date hereof and not as of any future dates and will not be supplemented or updated. All forecasts are speculative, subject to change at any time and may not come to pass due to economic and market conditions.


The Appeal of Hybrid Private Investments

From work/life arrangements to the energies used in our cars, demand for hybrid solutions is everywhere, including investments. Indeed, we see many investors transitioning to more hybrid structures in an effort to achieve their investment goals. Similar to the growth of customization as a way to refine investment solutions over the last two decades, we are now also seeing investment solutions adopt a more hybrid approach to their structure and/or investment universe. Investors are seeking combinations of investment features such as equity-like returns with traditional bond-like characteristics and thus looking at opportunistic alternative funds. These tend to be less constrained by traditional metrics, guidelines and mandates, investing across capital structures and into more niche investment opportunities. They may offer attractive risk/return characteristics thanks to the freedom of their mandate, potentially providing complementary risk/ return profiles to traditional portfolios, public equity diversification, stable returns and alpha/growth.3

The current environment is auspicious to these less constrained funds. They have the opportunity to identify mispriced assets across a spectrum of opportunities and determine the best investment method, presenting an attractive entry point for investors. Potentially less well understood than traditional investments though, and generally less liquid, care must be taken when evaluating an investment in hybrid funds. Partnering with a specialist is therefore key.

In addition to opportunistic alternative funds, traditional asset classes such as fixed income offer new hybrid funds that have the potential to deliver enhanced yields over core fixed income (see Display 4), thanks to hybrid features such as mezzanine positions and floating interest rates offerings, as well as increased access to private credit solutions (e.g., middle-market direct lending and consumer lending). Their hybrid attributes are particularly attractive for investors who can accept some illiquidity in exchange for enhanced and differentiated yields. In addition to positive real yields, these fixed income solutions may also offer downside risk mitigation for public equity exposure, which is now less available from traditional fixed income securities.

Display 4
Public vs Private Credit Risk/Return Profile

Source: Bloomberg Barclays High Yield index, S&P Leveraged Loan Index and Cliffwater Direct Lending Index. Data as of 31 December 2021.


As a consequence of the environment and these features, there appears to be significant growth particularly in private credit. On the supply side, borrowers continue to look to the private markets. Equally, borrowers value the adaptability and partnership of private lenders, often the only—or the lead—investor in deals. From a demand standpoint, the global search for yield continues. Today, it also includes a demand for assets that can hedge inflation and protect capital in untested market environments. As a result, investors are increasing their allocations to the asset class (Display 5), achieving differentiation through the types of private credit chosen and other sources such as geographic diversification. Private credit still offers relatively high spreads over public markets (Display 6), as well as covenants (lender protection), and floating rate or asset-based inflation protection. It is also likely to continue to exhibit low volatility due to its less liquid nature.

Display 5
AUM of Funds Primarily Involved in Private Debt Direct Lending Has Grown Tenfold in Past Decade
Display 6
Differing Credit Source Returns %

Source: BofA Securities, Bloomberg, Clarkson, Cliffwater, Drewry Maritime Consultants, Federal Reserve, FTSE, MSCI, NCREIF, FactSet, Wells Fargo, J.P. Morgan Asset Management. *Commercial real estate (CRE) yields are as of September 30, 2021. CRE – mezzanine yield is derived from a J.P. Morgan survey and U.S. Treasuries of a similar duration. CRE – senior yield is sourced from the Gilberto-Levy Performance Aggregate Index (unlevered); U.S. high yield: Bloomberg US Aggregate Credit - Corporate - High Yield; U.S. infrastructure debt: iBoxx USD Infrastructure Index capturing USD infrastructure debt bond issuance over USD 500 million; U.S. 10-year: Bloomberg U.S. 10-year Treasury yield; U.S. investment grade: Bloomberg U.S. Corporate Investment Grade


Environmental Conscience and True Alignment

An increasingly prescient theme has been the growing interest and engagement in environmental investments (see Display 7). ESG, as a topic, is now mainstream, it is no longer something just additional. Risks are being considered across investments, companies are being required to address ESG issues, activities are being targeted and investors are willing to divest if ESG issues are not addressed appropriately.

Display 7
Attitudes Toward ESG Risks and Opportunities, % of Respondents

Source: PwC 2021 Global Investor Survey


According to the placement agent Campbell Lutyens, $183 billion is being raised or invested across asset classes in climate-themed investments alone. As extreme weather events make global headlines and experts warn about a shifting climate, more investors are thinking about both environmental risks and how they might affect their portfolios. They are also looking for investment decisions that may contribute to environmental protection or where the investment has tangible metrics and performance indicators. Early adopter investors are also no longer oblivious to the growth opportunities created by compelling climate innovations and changing consumer preferences. As Private Markets investors engage on this topic, we see increasing opportunities to effect meaningful change through true alignment of interest. Indeed, certain progressive thinking investment firms are implementing direct linkage between their fees and the outputs their investments have on the climate or environment, a unique and important step by managers showing both confidence in their investment acumen as well as moral compass.

Whilst these observations do not represent the full extent of developments across what is a dynamically changing private markets investment landscape, they do represent some shifts that we believe could provide differentiated investment opportunities.

For more information, please contact your sales representative.


1 Diversification does not eliminate the risk of loss.

2 This creativity to address constituent needs has been a hallmark of the secondary industry as noted by the Harvard Business School (Summary Changeof Secondary Markets review, December 2021).

3 Diversification does not eliminate the risk of loss.

Managing Director, Alternatives Distribution Management

Risk Considerations

Historical performance information is not indicative of future results, and the historical performance information in this paper should not be viewed as an indicator of any future performance that may be achieved as a result of implementing an investment strategy substantially identical or similar to that described in this paper.

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