As the year draws to a close, private markets are benefitting from growing demand from investors. However, each category has its own unique characteristics. Brice Thionnet, UBP’s Global Head of Private Markets, and Hippolyte Abriol, Senior Investment Manager – Private Equity & Mandates, spoke to Allnews.
The following is a translated extract from the conversation published in Allnews, the full version of which is available here (in French).
What makes private markets attractive at the moment?
Hippolyte Abriol: Today, private markets offer diversification and return opportunities that are hard to get in public markets, especially given the current economic landscape. Since the global financial crisis, public market liquidity has dried up markedly, and a growing part of the investment universe can today be found in the unlisted space. For example, in the United States, the number of listed firms has halved since the peak in 1996, whereas 96% of European firms with revenues of over EUR 100 million remain in private hands. This gradual transfer of money into private firms is a structural trend which is only going to increase.
Furthermore, private portfolios are seeing growth in their passive management allocations, which often reduces diversification: today, the ten largest names in the S&P 500 represent 37% of the index. Given this concentration, private markets are providing an essential source of diversification, opening up exposure to less accessible listed sectors and optimising portfolios’ risk/return profile.
On top of this, in an environment in which the correlation between equities and bonds is greater than in the past, private markets offer returns that are only slightly correlated to traditional assets. This characteristic helps to reduce a portfolio’s overall risk and to achieve long-term return objectives. We think that private investors* will gradually increase their allocations to private markets to levels similar to those found in family offices and US endowments, which have long since dedicated around 30% of their portfolios to this asset class.
Can private investors* improve their risk/return profiles on this asset class that is usually reserved for institutional investors?
HA: Historically, private markets, and private equity in particular, have offered superior returns to liquid assets while offering lower volatility. This characteristic can partly be explained by the absence of daily market fluctuations, which enables investors to focus on a portfolio’s fundamental performance without being distracted by daily shifts in valuations.
Private equity also outperforms public equity markets thanks to proactive asset management, where funds play a central role in optimising operations and implementing growth strategies, such as growing new markets, mergers & acquisitions, and reorganising costs. These value-creation tools enable returns to be generated where listed companies, which are often constrained by quarterly performance demands, do not have the same strategic freedom.
‘In the United States, for example, the number of listed companies has halved since the peak in 1996.’
For private investors*, ‘evergreen’ vehicles have become private equity’s preferred point of entry. They enable capital to be deployed immediately along with continual reinvestment, whilst also offering relative liquidity, which suits those investors who are looking for a flexible and sustainable exposure. That said, for those who can tolerate a larger illiquid allocation in their portfolios and who wish to optimise returns and diversification, we recommend a combination of evergreen and closed-end funds. These closed funds give investors access to targeted and specific strategies, where the potential absolute performance is often much higher.
Private equity’s ability to generate value sustainably, combined with long-term investment resilience, enables private investors* to benefit from stable, outperforming returns, while improving the risk/return profile of their portfolios.
The performances put in by private equity funds is very patchy. How do you select the right funds, given that these are long-term commitments?
HA: We favour a selective approach that’s oriented towards mid-market funds, as these target smaller firms whose value-creation potential is generally greater. In contrast to large funds, which often buy firms from other private equity funds, mid-market funds frequently acquire firms held by families or founders. This particular feature offers greater scope to develop the firms and enables managers to have a real impact on the strategic and operational development of companies.
In the current context, relying solely on leverage is no longer enough to generate solid returns. Therefore, we highlight funds’ ability to use a range of growth drivers available to the firms in their portfolios. For example, some funds bring essential support to recruitment and to strengthening management teams, while also looking to attract key talent; others support firms in their digital transition by integrating artificial intelligence and optimising processes to improve their operational efficiency. Last, funds which have expertise in mergers & acquisitions actively contribute to external growth, thus enabling firms to speed up their development.
‘In private equity, we favour mid-market managers who have a clearly defined value-creation strategy.’
Our choice of funds is based on the in-depth analysis of each fund’s strategies, of their alignment with investors’ interests, and of their ability to navigate economic cycles. We also analyse historical performances, taking into account periods of economic slowdowns, as resilience is crucial for long-term commitment. By associating ourselves with those funds that are able to meet challenges as they arise and to operate agilely, we build resilient portfolios that are oriented towards sustainable, solid performances.
What are your convictions on private equity, private debt and infrastructure?
Brice Thionnet: In private equity, we favour mid-market managers who have a clearly defined value-creation strategy. We’re seeing signs of recovery in mergers & acquisitions with the fall in rates, which is stimulating leveraged-buy-out (LBO) activity and which should benefit private equity by reinforcing the opportunities this presents, and consequently distributions to those investors who have been looking for liquidity since 2022. This mid-market-based approach enables us to exploit the potential for transformation in mid-sized firms that are often undervalued, and which have significant growth potential.
For private debt, direct lending remains an attractive focus for those investors looking for stable returns, and we add this approach to hybrid strategies which combine debt and equity for more flexibility. Segments like speciality finance and asset-based finance continue to stand out, as they benefit from banks’ withdrawal from the space and the growing demand for specialised financing solutions. These strategies allow sources of returns to be diversified while responding to financing needs that are not covered by traditional institutions.
As for infrastructure, we are banking on the unique advantages of this asset class, in particular in the field of the energy transition and digitalisation. Infrastructure projects generate long-term, contractual revenues, often indexed to inflation, which offers protection against price rises. With stable revenue inflows that have little correlation to public markets, infrastructure provides portfolios with stability and resilience while also responding to the growing demand for investments in real assets.
Last, the secondary market continues to provide attractive opportunities in these three asset classes, enabling investors to access mature portfolios with solid, near-term return outlooks.
*Private investors are deemed to be ‘professional’ investors or the equivalent.
