Uncovering the Benefits of Investing in Private Markets
- Private markets assets under management (AUM) has grown at an annual rate of about 20% since 2017.
- Bolstered by a history of outperformance against public markets’ investment returns, investing in private markets provides an opportunity for potentially higher returns.
- Providing access to unique investment opportunities not available in public markets, private markets offer excellent portfolio diversification due to their low correlation with public markets.
- Fractionalisation allows access to institutional-grade investments in smaller ticket sizes, leveling the playing field for those seeking higher target returns, global opportunities and greater portfolio diversification.
Private markets offer access to unique and potentially lucrative investment opportunities in assets not publicly traded on stock exchanges. These include private equity, private debt, private funds and other alternative assets such as real estate and fine art. Such private markets investments can provide investors with potentially higher returns, enhanced portfolio diversification, unique investment opportunities and protection against inflation.
Impressive Growth of Private Markets
Based on McKinsey Global Private Markets Review 2023, AUM in the private markets has been growing at an impressive annual rate of about 20% since 2017. Total private markets AUM reached USD$11.7 trillion by 30 June 2022, in contrast to the USD$101 trillion global equity market cap in 2022, as reported by SIFMA. Preqin expects the private markets industry’s AUM to rise to USD$18.3 trillion by the end of 2027 from USD$9.3 trillion in 2021.
Outperformance of Private Markets
A major benefit of investing in private markets is the potential for higher returns. Historically, the hugely untapped private markets had consistently outperformed public markets in terms of returns. From 1990 to 2010, private equity firms outperformed the S&P 500 index by 6.3%, net of fees. Monetary Authority of Singapore’s Executive Director, Financial Markets Development Department, Mr Lim Cheng Khai, shared at the recent Private Debt Investor’s APAC Forum that private capital provided an internal rate of return of 15.1%, and outperformed the MSCI World Index by 5.6%, over the past 10 years to June 2022.
According to Hamilton Lane, a key factor which drives the outperformance of private markets over public markets is the liquidity premium associated with private markets. Private markets investments typically tend to have relatively longer holding periods. Higher returns in private markets may serve as compensation for longer lockup periods with investors’ capital. Hamilton Lane also emphasised that the trend of companies opting for an extended period of private ownership is another contributing factor. This strategic decision enables companies to better capitalise on their growth and innovation potential prior to going public.
In addition to potentially higher returns, private markets offer an excellent choice for portfolio diversification due to the inherent low correlation with the public markets. This can help to mitigate overall portfolio risk and increase stability, especially in navigating market uncertainties. This provides an edge over public markets, which are often driven by short-term volatility and market sentiments.
Unique Investment Opportunities
Private markets provide access to unique investment opportunities which are not available in the public markets. High-growth companies in the private markets may offer unique value propositions, cutting-edge technologies, and innovative business models that are not yet widely adopted. Investing in such high-growth companies at an early stage can provide significant returns if they become successful. Access to more detailed and non-public information about companies in the private markets aids investors with more informed decision-making to identify undervalued opportunities. Private markets also offer interesting investment opportunities in rare collectibles such as fine arts, wines, and classic cars that are not widely available in public markets.
Access to Private Markets through Fractionalisation
Due to the larger ticket sizes, private markets have traditionally been limited to institutional investors, private equity firms and large family offices. However, with the aid of technology, private markets investments can now be efficiently fractionalised and made available to a larger pool of accredited investors. Fractionalisation allows investors to access institutional-grade investments in smaller ticket sizes, levelling the playing field for those seeking higher target returns, global opportunities and greater portfolio diversification.
Enhanced Liquidity through Fractionalisation
Fractional investing, can now be efficiently facilitated by the process of “tokenisation”– which is the use of blockchain technology to record ownership rights in the fractional investments. This opens up the possibility for the seamless trading of fractionalised ownership in private markets on digital assets exchanges—precisely the purpose SDAX Exchange serves. While still in its nascent stages worldwide, the emergence of credible, institutionally-backed digital assets exchanges, like SDAX, paves the way for a future where private markets assets can be effortlessly bought and sold with a simple click. This newfound accessibility translates into enhanced liquidity and expanded opportunities for both capital needs and investors.
At SDAX, investors can explore a wide spectrum of private markets and alternative investments such as private equity, private debt/credit, commercial papers, inflation-hedging solutions, evergreen funds, real estate, collectibles and ESG investment opportunities. SDAX empowers investors to start investing in private markets from smaller ticket sizes, making private markets investments more accessible than ever before.
If you would like to find out more about such investment opportunities, please reach out to us.
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