Private banks and their high net worth clients (HNWIs) are jumping to the private markets in a big way in the wake of new market realities brought on by Covid-19.
Confidential interviews with private bankers and HNWIs conducted by The Asset, as well as anecdotal evidence, indicate that although the trend towards private markets investing began pre-pandemic, with strong growth experienced in 2019, in recent months there has been greater attention dedicated to it as investors seek out alternatives to public market assets.
Private market assets under management (AUM) grew by 10% in 2019, and US$4 trillion in the past decade, an increase of 170%, while the number of active private equity firms has more than doubled and the number of US sponsor-backed companies has increased by 60%. Over that same period, global public market AUM has grown by roughly 100%, while the number of US publicly traded companies has stayed roughly flat (but is down nearly 40% since 2000), according to Mckinsey’s global private markets review 2020.
“We see an increasing trend of clients looking at private investments or private markets. They want to look at what is the next Alibaba. And these are things where our clients are very interested in. So we see a growing demand in private investments,” says a senior banker.
As a case in point, almost all the top research firms, asset managers, securities houses, index providers, and exchanges have issued their own studies or surveys since the beginning of the year saying almost exactly the same thing: that there will be strong growth in the private markets from 2020 and beyond.
But below the surface, more than just studies and surveys are happening. At least one major private bank has gone to the extent of poaching the entire private markets team of a competitor to build up its own private markets capability. In July 2020, Julius Baer announced that the entire private equity team of UBS is moving in next month (October 1 2020)
What makes this development significant is that, while other private banks have been recruiting relationship managers (RMs) to beef up their client base and their bottom line, Julius Baer has also chosen to also invest in a private market team.
On a strategic level, hiring an entire private market team away from a competitor is an indication of how seriously the private banks, in general, see the growth prospects for the business as well as a signal of its willingness to meet client demand.
The fact that HNWI clients are willing to invest more in private markets is an indication of how challenging it has become for investors to make money in the public markets with the flood of liquidity in the wake of negative interest rates.
In addition, more and more public companies are going private again in the face of new realities and issues that have made the public markets a more dificult investment environment.
“The private market landscape continues to change, especially amid the recent Covid-19 pandemic. Public market volatility, as well as evolving regulatory and reporting requirements, have raised the barrier to entry to the public market, leading more private companies to pursue secondary programs to return value to investors and employees,” says Eric Folkemer, head of Nasdaq Private Market, in a report titled “The Future of the Private Market: Trends to Watch in 2020”.
Folkemer says the four trends to watch in the private markets are: more companies may seek liquidity in the second half of 2020; private companies are likely to stay private longer; frequency of liquidity events may increase; and more capital may enter the market.