Delio’s predictions for private markets in 2022David Newman
Following the initial shock of the pandemic, private markets have had a buoyant 18 months with rising asset prices and capital raises, as well as broader market growth in terms of investment in infrastructure, technology, innovation, and new entrants. But, what will 2022 bring? Delio’s co-founder, David Newman, took a closer look and set out five key predictions:
- There will be no stopping the democratisation story
- Institutional competition will increase in all parts of the market
- Rising asset prices will lead to more complex transactions
- Regulators will struggle to play a balancing act between supporting innovation and robust governance
- Secondary market noise will grow but still not reach a genuine depth of liquidity
No stopping the democratisation of private markets in 2022
Given our closeness to the wealth and retail market, it is no surprise that our first prediction is that the democratisation of private markets will continue to grow. It is hard to go a week without an article in the press about the opening up of private markets or a new entrant tackling the democratisation of one illiquid asset class or another. We are confident that the tailwinds to support this trend will continue to gather momentum, and we expect this to be a continued prediction for years to come.
The past year saw increased support of democratisation by regulators. Whether redefining the criteria to be an accredited investor (US) or creating special funds (France), the legislative barriers that have prevented access are slowly being torn down. With innovations in technology making it easier to open up access, the industry continues to open its doors to an audience beyond traditional ultra-high-net-worth and institutional investors. Nonetheless, 2022 is likely to be a year or two too early to predict the mainstreaming of tokenisation and move to t+0 settlement.
With the majority of traditional institutions creating new teams to build out private market offerings, those with access to the broadest base of investors are increasingly supporting the democratisation story and will help ensure it continues to grow at pace in 2022.
The rise of market participants
The compression of returns in liquid markets, combined with the increased desire for individual investors to access private markets, will encourage asset managers to expand their private markets efforts.
The coming months will see more PE fund launches than ever before. More so, European managers will be busy launching ELTIF and LTAFs – regardless of personal views on whether these are the suitable structures to drive the democratisation story forward. While more traditional asset managers have begun to announce their new focus on private markets, we believe even more asset managers will take the plunge in 2022, leading to further private markets and hedge funds.
But, it is not just the buy-side that will see growing competition across the industry. As the ‘businesses stay private for longer’ angle won’t go away anytime soon, 2022 will see a further wave of investment banks building dedicated private markets desks within their equity capital markets franchises. I would be surprised if any tier one investment banks without a private markets team existed by the end of 2022. Instead, most traditional brokers will have launched growth financing to sit alongside their nomad/listing businesses.
This competitive element will become more prominent thanks to the strides in democratising access to private markets. A wave of entirely new market entrants will join independent investment platforms such as iCapital Network, Moonfare, CAIS and Titanbay to offer access to lower minimum tickets. While some will focus on specific verticals or niches, such as venture capital, co-investments and real estate, others will try to furnish their D2C credentials. All the while, established players will try to diminish the conflicts of interest across their D2C/B2B2C models and move to B2B instead.
Soaring asset prices and complex transactions
The net result of this increased flow of capital is asset inflation. The early stages of the pandemic saw a real sector stage and style rotation, which have led to a consistent rising tide of asset prices and ballooning company valuations. These calls won’t go away with more noise around overinflated asset prices.
The continued wall of capital has led to a more competitive market, easier access to capital and higher valuations. While this can have significant economic benefits and supports global growth, it does increase risk and depresses returns.
Given the lack of standardisation, one response that we expect to happen across 2022 is the increased complexity of transactions. This means growing flexibility surrounding the terms designed to structure downside protection, and more opportunistic investors will allocate across the capital spectrum and structure multi-asset hybrid deals with debt, equity, and real estate components. Lawyers may be one of the biggest beneficiaries of this, but it will also be a helpful mitigant in reducing the risk of transactions for those who know what they are doing. In this scenario, investors will need to be scrupulous in who they work with, as experience in complexity is necessary.
Balancing increased access with regulatory robustness
As the return risk trade-off becomes less favourably skewed and transactions get more complex, it will be interesting to watch this evolve alongside the democratisation story.
Notwithstanding the tailwind to opening up private markets access for investors, regulatory safeguards need to be enhanced to protect them. In the coming months, we can expect regulatory boards to tighten up the frameworks that respond to the growth in private markets.
It has been encouraging to see the FCA reviewing the HNW/SI definitions and looking into the appropriateness test rules. With this in mind, 2022 should start to see some of the more credible regulators follow this lead while still supporting the opening up of access to illiquid assets. More scrutinised institutions will follow suit, pragmatically balancing the increased technical ability to open access for smaller clients with a strong focus on robust governance.
The rise of the secondary market
The noise around secondary markets will continue at pace in 2022. There is some genuine excitement about pre-IPO focused marketplaces such as Forge, EquityZen and the recent spin-out of Nasdaq Private Markets. Even alongside the execution challenges in this part of the market, outside of the pre-IPO space, secondary markets continue to lack any meaningful depth to bring about real liquidity either within funds or in directs. New exchanges will be launched while existing ones will enhance their processes and traction. Regardless, we do not agree with the predictions that we are on the cusp of real secondary markets across the private markets landscape. Price discovery, ready-made pools of buyers and sellers and information symmetry and standardisation all need to be enhanced to reach that point.
Notwithstanding the arguments over whether bringing this secondary exchange is a good thing or not and the extent to which it a) undermines the liquidity premium and b) can provide liquidity in times of need, 2022 will see more movement towards frameworks that offer investors secondary market transactions.
Increased capital and enhanced technology will make it easier to launch secondary market initiatives. Hopefully, this will begin to serve the bedrock of future connectivity across private markets across the rest of the decade.