The outlook for private markets in 2023

Over the last decade, private markets have seen strong and consistent growth year on year. While this trend continued in 2022, the economic and political turbulence of the last 12 months meant that the increase in value of private assets under management (AUM) was much more subdued.

As we enter 2023 under the storm clouds of a likely global recession, it’s perhaps unsurprising that industry experts are warning of a much more cautious outlook regarding what may be in store for private markets.

However, that’s not to say that the forecast is all doom and gloom. Many experts are still predicting long-term opportunities from the asset class. Historically, economic downturns have often created opportunities for shrewd investments into private assets that become available at depressed valuations. If selected carefully, they can demonstrate long-term resilience and generate excellent returns through well-timed exits as economies recover. This strategy is set to be tested in 2023 and beyond.

So, what lies in store? We’ve taken a look at some of the key themes in private markets that are likely to emerge in the year ahead.

More ‘realistic’ asset valuations likely to emerge

Experts are speculating that asset valuation is likely to be subject to a ‘reality check’ after several years of over-valuation. In recent years, rapidly accelerating demand for private markets has seen capital flow into the sector with relative ease. As a result, the overvaluation of assets has become a well documented and fairly common phenomenon as investors clambered to join the private markets party.

2023 is likely to see a ‘levelling’ of these valuations, which in turn will offer some compelling opportunities for investors that are happy to take a longer-term view. Commentators have also highlighted that multiple ‘investment sweet spots’ remain despite the economic slowdown, particularly in areas such as energy and healthcare.

Private markets still expected to grow given the longer-term nature of opportunities

BlackRock Alternatives argue that investors are still likely to be drawn to alternative assets in 2023 as they seek longer-term opportunities in which to deploy capital. They believe that ‘durable global trends’ such as the transition to a low carbon economy, ongoing technology adoption, and emerging demographic shifts will all contribute to the ongoing growth of private markets in the year ahead.

They also suggest that investors are likely to be attracted by the growing diversity of opportunities offered by private markets, with more companies staying private for longer or focussing their capital and finance raising needs through the sector.

Market volatility likely to result in attractive opportunities

History has shown that for those investors that can allocate to alternative assets, this period of market volatility could offer up some potential bargains as valuations drop; in the words of Schroders Capital’s CIO Nils Rode, “recession years tend to be particularly attractive vintage years”.

These comments were echoed by Karen Ward, JP Morgan Asset Management’s chief market strategist for EMEA, who said that private markets still offer compelling opportunities, as long as investors remain very selective in how they deploy their capital.

Significant growth anticipated in secondary markets

The secondary markets appear to be an area that is expected to grow significantly during 2023, with opportunities for both GP-led transactions and traditional LP secondaries.

In this space, GP-led transactions will likely benefit from other exit routes, such as IPO and M&A exits, becoming more challenging. For LPs, it’s expected that opportunities to acquire stakes from distressed sellers will increase during 2023.

The impact of the Great Wealth Transfer

We have already entered a period in which huge amounts of wealth is set to transfer to younger investors. Cerulli projects that $84trillion of wealth will be transferred between now and 2045 in the US alone. This next generation of investors tend to view private markets as offering more favourable returns than public markets and are also set to deploy more capital to ESG focussed investments.

As a result, there is a clear need for financial institutions to plan how their investment services will meet the changing needs of future investors. Private markets are likely to continue to play a significant and growing role in portfolio diversification and will be vital to how institutions engage with this new type of younger investor.

Digital access to private markets

As client’s demand greater access to alternative assets, delivering a proposition digitally will become even more important for financial institutions. As this Private Banker International article explores, investors are no longer likely to be satisfied by periodic face-to-face meetings with printed reports. Instead, they increasingly expect a technology-led offering, with access to opportunities presented in real-time, information available on-demand, and the ability to complete transactions digitally.

Financial institutions that are providing access digitally are also likely to appeal to the younger demographic of investors that were mentioned in the previous section. In an increasingly competitive market, that is likely to become a vital part of how an institution positions itself to existing and new clients.

Increased regulatory scrutiny

In 2022, the FCA announced a series of rule changes that will materially impact how firms operating under the UK regulatory regime promote products to retail investors and approve financial promotions.

The first of these changes came into effect from 1st December 2022, with the remainder needing to be actioned by 1st February 2023. Our briefing note covers what they mean for firms and clients operating under this regulatory regime.

It’s likely that this increased focus on regulatory governance will continue and it’s anticipated that other global regulators could follow a similar path over the course of 2023.

In summary… a year of cautious optimism ahead

Given the economic climate, it’s likely to be little surprise that the outlook for private markets in 2023 is one of caution. However, there’s still plenty of evidence to suggest that it will be another year of growth and that alternative assets will play an increasingly important role as investors diversify portfolios and adopt longer-term strategies.

Firms that are offering their clients access to private markets, or are contemplating doing so, will need to think about how they deliver this in a way that meets the needs of investors now and in the future.