Private Equity

The Continued Democratization of Private Equity

December, 2019 – 2 min read
Private equity is an asset class that has traditionally been available only to very large, sophisticated institutional investors. But this is changing rapidly—a trend we expect to accelerate in 2020.

This post is part of our 2020: The Road Ahead series⁠—read, watch or listen to the full conversation here.
 

Biggest Risk

There are a number of late-cycle risks in the private markets today, many of which result from a combination of high purchase price multiples, high leverage and increased competition at the larger end of the market. The sheer amount of dry powder in the market is exacerbating the problem and driving concern among investors. As a result, we’re seeing compressed deal timelines, accelerated due diligence periods and adjustments to business earnings—all of which create a climate of stretched valuations, or deals that have essentially been priced to perfection. Despite being somewhat typical late-cycle behavior, this is a risky trend as we think about the ability of businesses to withstand a downturn from both a performance and leverage perspective.

PE DRY POWDER HAS GROWN SUBSTANTIALLY OVER THE LAST DECADE
PE: ASSETS UNDER MANAGEMENT (2009-2018)

Source: Preqin. As of December 2018.
 

Biggest Opportunity

Despite the risks, there are a number of bright spots. Looking across the private equity markets, we are seeing three particularly compelling pockets of opportunity. The first is at the lower end of the private equity market, particularly with emerging managers. As we mention in our podcast episode, Private Equity: Emerging, Women & Diverse Managers, these are often first-time private equity funds that have spun out from larger institutions. Often, these funds have proven track records and, importantly, exhibit a strong hunger and desire to succeed—that tends to be strongly aligned with their investors. Another interesting opportunity we’re seeing today is in private equity co-investments, which can provide access to highly coveted deal flow.

Within the real assets space, the metals and mining sector offers an interesting opportunity, in our view. Given where commodity prices are today and where they’ve been in recent years, we think there is attractive value in what we refer to as later-stage development deals. In particular, we are seeing potentially attractive gold, copper and other high-quality base metal projects that have been under-capitalized for an extended period of time.
 

Bold Prediction

We think 2020 will bring with it the continued democratization of private equity. Private equity is an asset class that has traditionally been available only to very large, sophisticated institutional investors. But in the past 10 years, private market investment opportunities, including private equity, have become increasingly available, whether through 40 Act funds for retail investors or interval funds for everyday investors. One big contributor to this has been the strong historical performance of the asset class. And to the extent that it continues to outperform, we will likely see a continued push to make it available to everyone.

To be clear, this doesn’t necessarily mean we will start to see private equity investments within our 401(k)s. But we will likely see interesting and innovative structures that provide broader access to the asset class. While we are cognizant of the risks that come along with that—such as liquidity, valuations and the complexity of the market—we think the space is a good diversifier overall, and may make big strides in 2020 among a less traditional investor base.

This commentary is provided for informational purposes only and should not be construed as investment advice. The opinions or forecasts contained herein reflect the subjective judgments and assumptions of the investment professional and do not necessarily reflect the views of Barings, LLC, or any portfolio manager. Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted and actual results will be different. We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice.

Elizabeth Weindruch

Managing Director

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints