Delio outlook: private markets in 2021
After a hugely challenging year for many industries across the globe, we enter 2021 with cautious optimism that accelerated vaccination programmes will enable a shift in focus away from the pandemic and back to economic stability and growth.
While private market investments performed relatively well in 2020 and saw significantly less volatility than public markets, capital raising activity was certainly not immune to the detrimental effects of Covid-19. The first half of the year saw a marked decline in investment activity as investors sat on the sidelines, changed deal structures or focused on existing portfolio companies in the face of a global economic downturn and heightened market volatility. Meanwhile, for advisors, the inability to engage with their investor base in ways that were previously taken for granted, such as networking events and in-person meetings, meant that financial institutions were forced to adapt their approach and accelerate their own digital strategies in order to service their clients.
As we reported in our 2020 research paper, it quickly became apparent that the only way for financial firms to successfully weather the storm was to digitise their offering and accelerate their use of technology. Those financial firms that took quick and decisive action will already be in prime position to capitalise; both in 2021 as the world continues to be socially distanced in the short-term and in the longer-term post-Covid market. We expect that this drive towards digitisation will continue with a greater focus this year on integrating digital tools across businesses to provide a better client experience.
Democratisation of private markets set to continue
Along with this rise in technology and digitisation, we are also expecting the democratisation of private markets to continue at pace. Global regulations have evolved significantly over the last few years, highlighted by the SEC’s decision to expand its definition of an accredited investor last September. This trend is emerging across the world and with greater visibility of alternatives to public markets, demand from wealthy individuals for access is increasing. As a result, we see a continued acceleration of the need for wealth managers to respond and offer private markets as a core component of a holistic offering or face not meeting their clients needs.
David Newman, Delio’s co-founder and chief commercial officer commented:
“Whilst there is no denying that the pandemic caused seismic shifts in activity in private markets last year, significant opportunities presented itself and the industry found particular comfort in leaning on history, with the 2008/09 financial crisis leading to one of the better ever vintages for PE funds, in order to help with its recovery.
The underlying tailwinds supporting a continued shift to private markets will not fall away and I think 2021 will be the year in which we’ll see more capital than ever allocated to private markets. With democratisation of access becoming mainstream, we will also see retail investors playing a greater role than ever before.”
Where is capital likely to be deployed?
Many commentators predict that the events of 2020 are likely to have a significant long-term impact on the way we live our future lives. We have already seen the devastation caused by Covid-19 to the hospitality, high-street retail and aerospace industries; at the other end of the scale, the online retail and technology sectors have been booming as the world became increasingly reliant on digital access to goods and services.
So what does this mean for investors? Technology has been a core sector for many investors for several years now and the pandemic is likely to only strengthen this position, with a particular interest in artificial intelligence and automation. The healthcare sector has been thrust into the limelight as a result of its pivotal role in helping the world return to normal; this has resulted in a heightened awareness of its importance across investors.
Perhaps the biggest change in attitude will be in the acceleration of interest for ESG (Environmental, Social and Corporate Government) or impact investing. While this has been a hot topic for several years, the pandemic, several catastrophic environmental disasters, and changing societal attitudes have all ensured that impact investments remain a key component of the modern investors’ portfolio.
History tells us we can look forward with confidence
Looking back to the financial crisis of 2008, we can see that private markets offered consistently strong performance throughout the decade that followed. For investors who value strong returns and a longer-term view of their portfolio, we believe that private markets continue to offer a sensible balance of risk versus return. The challenge for financial institutions will be to ensure they are positioned effectively to grant their clients access to the opportunities they demand.
If you’re interested in finding out more about our thoughts on the year ahead, keep an eye out for our suite of upcoming events discussing pertinent industry topics.