October 24 Private Markets Intelligence

Insights

The Great Wealth Transfer

• The biggest intergenerational transfer of wealth in history is upon us. Members of Gen X, Millennials, and Gen Z are expected to receive $73 trillion in assets from Baby Boomers over the next 20 years(1).
• Younger generations are typically more inclined to invest in alternative assets; according to a Bank of America study, 75% of investors ages 21-42 agree it’s not possible to achieve above-average returns with traditional stock and bond portfolios. They are more open to alternative asset classes than their older counterparts.(2)
• Private markets are already growing at more than twice the rate of public markets(3) and this change in investor demographics should enhance that growth. For reasons including increased IPO costs, regulatory burden, and short-term-investor scrutiny, as of 2022 the number of publicly listed companies had decreased 42% from its peak in 1996(4). Continued growth in private markets means growing companies can source large amounts of capital without going public.
• These demographic and capital market shifts point towards private investments as a source of exposure to new technologies and business models that are otherwise not available in the public markets.
• Alternative investments are characterized by disparate data sources and more nuanced valuation and performance assessments, requiring family offices and wealth advisors historically focused on managing traditional investments to upgrade processes, systems and tools to adequately service the needs of younger investors.

(1) Merrill
(2) 2022 Bank of America Private Bank Study of Wealthy Americans (from the same Merrill article)
(3) Bain & Co.
(4) World Bank

Do Election Years Affect Private Equity Returns?

• According to a study by Neuberger Berman, the answer is no. The study focused on assessing whether private equity performance or volatility is higher or lower than normal during presidential election years.
• Historical evidence does not support that elections have a direct effect on private equity performance. Further, investors may alter sector-based strategies based on expected policy shifts but not overall allocation to the asset class.
• Using fund performance data going back to 1984 it found that, on average, performance is similar for election and non-election years. Furthermore, any elevated volatility in election years can be attributed to economic and market events rather than the elections themselves.(1)

(1) Neuberger Berman

Numbers

Private Credit

• The latest numbers behind the exponential growth of private credit are staggering: the seven largest publicly traded PE firms* allocated a massive $121.1B in credit strategies in Q2.(1)
• This number dwarfs their allocation to private equity which totaled $11.3B during the same period.
• While these numbers only capture mega-fund activity, it highlights a secular trend relevant to investors and borrowers of all sizes. Private credit is no longer just traditional corporate loans. Rather, it is a catch-all term for a plethora of credit investments such as asset-based loans, factoring, and equipment leasing that provide a variety of strategies for investors seeking fixed-income alternatives.

*Blackstone, KKR, Apollo Global Management, The Carlyle Group, Ares Management, TPG and Blue Owl
(1) Pitchbook

Spotlight

Regenerative agriculture

• Agriculture is the single largest driver of global biodiversity loss(1). Our current food production systems are depleting natural assets and decreasing the quality of soil, ultimately impacting the productivity of farmers.
• Regenerative Agriculture (RA) is a set of principles and practices that emphasize soil health and the production of food free of harmful contaminants. The practice has gained attention for its positive ecological contributions such as carbon sequestration, but a recent study by BCG lays out the business case for RA indicating farmers may reap up to 120% increase in profits and a 15-25% ROI over a 10-year period(2).
• There is strong investor interest in funding the technologies and business models needed to accelerate the adoption of RA. A limited allocation to an RA thesis can be an effective strategy to for an investor to learn more about the space, position themselves to take more meaningful positions as the sector matures, and use capital to enable a positive health and ecological impact.
• There are a diverse set of strategies to invest in RA including Regenerative Land Trusts (REITs), Regenerative Debt Funds, AgTech Funds, and Regenerative-focused Funds. Regenerative-adjacent investments such as biochar can also improve soil health and sequester carbon without requiring a wide-scale pivot in farming practices to be successful.

(1) (2) BCG, OP2B, WBCSD, May 2023, “Cultivating farmer prosperity: Investing in Regenerative Agriculture