As higher interest rates bite, here are 5 private market investment trends to expect in 2024

The low interest rate era of recent decades encouraged a flood of investment capital to the private markets space. This has allowed fund managers to raise funds and borrow cheaply, while enabling companies to stay private for longer rather than seeking a listing on a public exchange.

Assets under management nearly tripled between 2015 and 2022, growing from $4.5 trillion to $13.4 trillion – or about 10% of global capital under management. Private capital is now used to finance every type of enterprise in the real economy. It spurs innovation via venture funding of startups, provides non-bank lending lines through private credit and supports the development of long-term projects in real estate and infrastructure.

It is also fuelling innovation in new markets like sustainable energy and generative artificial intelligence (genAI). In the 12 months following the 2022 passage of the US Inflation Reduction Act, for example, $496 billion in private capital was raised for the energy transition, while $50 billion was raised for genAI in 2023. This funding has a tremendous impact across the global economy.

But the recent shift by many central banks to a higher-for-longer interest rate regime has slowed down fundraising in this sector. As a result, large asset allocators such as pension funds are now prioritizing liquidity needs, changing their capital allocations as valuations and return expectations adjust, while fund mangers are looking at new ways to create value.

Such changes were explored throughout the programme at the 2024 Annual Meeting of the World Economic Forum in Davos, and five key insights emerged about the future of private markets.

Despite a recent slowdown in fundraising and deal activity, there is still a record amount of dry powder – or uninvested capital – to be deployed across all asset classes. But, as interest rates stabilize, private investors are turning their attention from shorter term liquidity needs back to longer term value creation strategies, focusing on how operational expertise can deliver margin growth, not just multiple expansion.

Far fewer companies can continue to be profitable or competitive in the current interest rate environment. This means investors will have to be discerning with their targets and focus on strategic portfolio operations and human capital management.

Global IPO activity (when a company lists on a publicly traded exchange such as NYSE) has fallen in recent years. Listing on an exchange is one way to pay investors back and get access to more capital or send a signal to the market about the stability or credibility of the company.

Going public is not the right path for every growing company, however. Many are not ready for the disclosures or the volatility of listing on a public exchange. They may benefit from staying private, especially if they have access to enough capital or revenue to continue operating at today’s higher cost of borrowing. This is where the secondaries market – which has also boomed as IPO activity has stalled – can help by providing opportunities to sell stakes or entire companies between private funds.

In an example of bridging the gap of listing-readiness, the Hong Kong Stock Exchange has adapted the listing requirements for its Growth Enterprise Market. This helps small and medium enterprises to access liquidity and transition to the main exchange via slightly different requirements for reporting, market capitalization and lock ups (when shareholders are restricted from selling shares for a certain period post-IPO).

In recent years, even as more capital and attention has flowed to technologies that promote decarbonization, adaptation and climate resilience, there has been politicization around the use of environmental, social and governance (ESG) factors in managerial and investment decision making. This has led to anti-ESG legislation – some US states have even announced plans to withdraw capital from certain asset managers due to their ESG strategies.

And in 2024, with more than 2 billion voters in 50 countries going to the polls, it is increasingly important for investors to incorporate political climates and election cycles into their risk assessments for capital deployment, portfolio operations, stakeholder relationships and exit opportunities.

In an increasingly fragmented financial system, investors must also manage the risks stemming from the weaponization of the financial system, as well as consider supply chain, cybercrime and geopolitics, alongside traditional financial risks.

As fundraising has slowed among the traditional sources of capital, the retail wealth channel (individual investors) presents a large – and largely untapped – opportunity for private market funds. Many retail investors currently have limited access to private markets due to issues including access barriers, suitability requirements, regulatory and education gaps. This means they may miss out on potential opportunities for enhanced returns and income, as well as additional investment diversification.

Private wealth has already caught the attention of large private market players, as we have seen with recent launches by Apollo, Blackstone and Carlyle. It will continue to attract funds, but the retail sector has its own liquidity and risk needs that require specific solutions for fees, lock-up agreements, distribution models and regulatory oversight. Technology can play a role here by improving access points, retooling education, and innovating on products and liquidity in the secondary market.

Every conversation about private markets at the 2024 Annual Meeting alluded to the rapid growth of private credit and lending by non-bank financial institutions. Spurred by the 2008 Global Financial Crisis and the regulations and restrictions that fell on traditional banks, non-bank financial institutions – from public pension funds to insurers, foundations and family offices – have stepped in and provided lines of credit to businesses.

As a result, the private credit market has grown seven-fold since 2008 to nearly $1.7 trillion in assets in 2023. This has attracted the attention of regulators: private credit loans typically have a floating rate (versus the fixed rate of a bank loan), as well as higher spreads and limited liquidity. They are also often more opaque in terms of tracing who is underwriting, packaging and distributing the loans, which may present an outsize risk versus traditional bank lending.

While there are concerns this asset class is becoming another bubble, the other side of the argument is that private credit actually lends non-leveraged long-term money and aligns lender and creditor time horizons more closely than traditional bank financing. It creates more options for companies who cannot secure bank lending and lowers risk by spreading it throughout the financial system instead of concentrating it among banks.

In addition, new banking regulations on the horizon could introduce uncertainty and create tailwinds that could promote further growth in the sector.

Private markets will continue to grow and provide the requisite financing to companies around the globe. Even with economic headwinds, geoeconomic shifts and regulatory pressures, private capital will continue to be an important source of diversification and returns for investors – from large institutions like pensions to a growing segment of individual investors.