The world of private investing topped the charts in 2023 as one of the fastest-growing asset classes in the world. Global assets under management peaked at $5.8 trillion in 2021, backed by an additional $737 billion in additional investor capital. Analysts expect investor interests will continue to shift towards the nonpublic market, with private equity alone making up 64% of the AUM-weighted portfolio.
And the trend is only set to grow.
“There is nothing but opportunity ahead for the right private investor,” says Francois-Xavier Morency, an expert in private equity markets. “The inflows show no signs of deceleration, and the market is flush with more opportunities to get involved.”
Morency, an international business professional, has spent years studying the ebbs and flows of the private equity market. Like many other experts contributing to the field, he believes there are several new trends in private equity creating new possibilities for first-time investors.
Top five trends in private equity explained
Private equity is, by nature, a less competitive form of long-term investing. As public markets continue to swell and underperform in global markets, private investments may quickly become one of the hottest markets for experienced investors. More leveraged buyout deals are on the horizon, as well as greater opportunities for ESG and private credit funding. As moderate-income investors explore their options, current participants may want to reconsider their marketplace positions.
1. Leveraged buyout deals are on the horizon
Leveraged buyout deals refer to private market transactions that purchase companies through a combination of equity and debt. A private fund will purchase a firm via its own assets and leveraged debt, eventually paying down the debt to provide a return on equity.
Today, global buyouts and growth equity have substantially grown in volume. 2021 saw a 50% year-over-year increase within a period of 12 months. This amounted to more than $2 trillion in 14,000+ transactions, suggesting investors are injecting more capital into buyout-related funds.
International buyouts are also gaining strength. Although nearly all buyout vehicles target North American investments, European and Asian markets may be a close second. More than a quarter (27%) of private buyout funds target businesses in the UK, while another 11% focus on Asia.
2. ESG investments will continue to rise
As investors transition to sustainability initiatives, opportunities in environmental, social, and governance-related industries become more appealing. More than 50% of total investor funding in 2021 was directed at companies with formal ESG policies. This is the highest number in recorded history and is only set to rise.
With this in mind, certain utilities may soon fall out of favor. Traditional energy investments, including coal and gas, may lose their luster in the private market. Instead, investments like impact funds will continue to grow, with activity increasing by 16% per annum since 2016. Picking the right investments is key here, as there is a hype in ESG investments that should not trump real returns.
3. Private credit funding will reach its stride
In the past, private equity funds relied on traditional banks to reach their financing goals. Today, an increasing number of PE vehicles are turning to alternatives like private credit funding.
Nearly half of all private equity firms (45%) increased their use of private credit funding in 2021, with similar numbers projected for 2023. Private borrowers may have increased access to higher amounts of leverage, opening doors for moderate-income investors.
4. Less competition plus more PE firms equal additional opportunity
The private investing market is only set to grow. As fewer investors venture beyond the confines of public investment, more and more opportunities become available.
The numbers don’t lie:
- PE is the highest-performing asset class within the private market, with a pooled IRR of 27% in 2021.
- Venture capitalism and growth equity make up 47% of private equity fundraising.
- There are now 13,814 PPE funds in the US, which has increased by 2% from 2022.
5. More moderate-income investors hit the market
The private equity market is more accessible than ever. Although some PE funds require a substantial investment to enter, others are beginning to lower their thresholds.
Some funds list a minimum contribution of $25 million or more to enter. Others have become far more modest, listing minimums as low as $250,000.
A look to 2024
High inflation rates, uncertain supply chains, and widespread labor shortages continue to cloud the future of private equity investing. Nevertheless, experts are confident the market will continuously show great promise.
“Private equity investments have bounced back to and almost exceeded their pre-pandemic levels,” Morency says. “Shrewd investors would be wise to get ahead of the curve and take advantage of the coming trends.”
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Francois Xavier Morency is a veteran investor with decades of experience working with equity investments. He has participated in traditional equity markets as well as startup investing for brands in the earliest stages of growth. He currently acts as a trustee for smaller family trusts and emphasizes the conservative management of assets for long-term results and performance.
Mr. Morency used his extensive experience in business development to perform in a Managing Director role as the Canadian Operations of Supply Service with A.P. Møller-Mærsk. He is a proud chemical engineering alumni (1998) from the Université de Sherbrooke in Québec, Canada.
To learn more about Francois-Xavier Morency, please visit his Linkedin profile.
