Key Takeaways
- • Schroders argues private markets have reshaped corporate financing: US listed companies have fallen by nearly half since the 1996 peak, with only about 127 new US listings a year since 1999 versus over 300 a year between 1980 and 1999.
- • Asset-based finance represents more than $13 trillion of loans, versus about $1.7 trillion for direct lending, and the two should not be conflated because asset-based loans are secured on specific assets' cashflows.
- • Schroders cites private equity buyouts outperforming US large and small caps net of fees over the long run, but warns that smoothed valuations can make private assets appear less volatile than they are.
- • Manager selection matters more in private assets, with the return gap between top and bottom quartile global buyout funds around 15% on average.
- • Schroders advises investors to seek less crowded markets, noting that record 'dry powder' and heavy fundraising risk higher prices and lower future returns.
Summary
Schroders argues that private markets have become central to how companies finance themselves. The article notes that Google raised only $25 million privately before its 2004 listing, while companies today raise more than 500 times that amount privately. In the US, more than 300 companies a year joined the stock market on average between 1980 and 1999, compared with 127 a year since, and M&A-driven delistings have reduced the number of US listed companies by nearly half since the 1996 peak.
The article draws a distinction within private debt. Direct lending, about $1.7 trillion of loans, is private corporate lending repaid from general corporate cashflow and therefore correlated with corporate risk. Asset-based finance, more than $13 trillion of loans, includes commercial real estate, infrastructure, consumer and lease finance, and is secured on and repaid by the cashflows of specific assets.
Schroders lists five appeals of private assets: higher returns and income, with private equity buyouts described as outperforming US large and small caps net of fees over the long run; access to broader exposures, such as infrastructure debt being more diversified by sector and region than public infrastructure bonds; lower reported risk, tempered by the caveat that valuation methodologies can smooth price variability; diversification from differentiated return drivers rather than correlation statistics; and direct impact exposure, particularly in renewable energy, affordable housing and microfinance.
On risk, the article cautions that real estate risk is closer to equities than bonds, and that large-cap buyouts carry more leverage than public equities. Floating-rate private debt can act as a stabiliser when rate volatility is the driver. Schroders also flags practical constraints: record dry powder, competition in large buyouts and direct lending, and the importance of structuring skill in private debt. The firm concludes that investors focused solely on public markets risk missing out, but should seek less crowded markets. The article carries a risk warning that investors must be able to sustain a total loss in private assets.
The article draws a distinction within private debt. Direct lending, about $1.7 trillion of loans, is private corporate lending repaid from general corporate cashflow and therefore correlated with corporate risk. Asset-based finance, more than $13 trillion of loans, includes commercial real estate, infrastructure, consumer and lease finance, and is secured on and repaid by the cashflows of specific assets.
Schroders lists five appeals of private assets: higher returns and income, with private equity buyouts described as outperforming US large and small caps net of fees over the long run; access to broader exposures, such as infrastructure debt being more diversified by sector and region than public infrastructure bonds; lower reported risk, tempered by the caveat that valuation methodologies can smooth price variability; diversification from differentiated return drivers rather than correlation statistics; and direct impact exposure, particularly in renewable energy, affordable housing and microfinance.
On risk, the article cautions that real estate risk is closer to equities than bonds, and that large-cap buyouts carry more leverage than public equities. Floating-rate private debt can act as a stabiliser when rate volatility is the driver. Schroders also flags practical constraints: record dry powder, competition in large buyouts and direct lending, and the importance of structuring skill in private debt. The firm concludes that investors focused solely on public markets risk missing out, but should seek less crowded markets. The article carries a risk warning that investors must be able to sustain a total loss in private assets.
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