For example, large private equity buyouts returns are strongly influenced by public markets, but the relationship is much weaker in small and mid-cap buyouts and venture capital. Early-stage venture capital depends less on stock markets and the economy (as companies typically have no or low revenues and no earnings), but on progress in product development and initial customer wins.
Similarly, many infrastructure projects exhibit greater cashflow stability and less sensitivity to the economic cycle than the corporate sector so can diversify equity exposures elsewhere.
On the private debt side, direct lending has a similar risk sensitivity to corporate bonds (aka corporate risk premium), whereas asset-backed lending such as real estate and infrastructure debt, and consumer lending has exposure to the underlying cashflows from an asset or package of assets, so it is fundamentally different.
In terms of the relationship with interest rates and traditional bonds, more leveraged equity investments will be more vulnerable to movements in bond yields/financing costs than less leveraged investments.
The floating rate nature of much private debt also means that higher interest rates feed directly into higher returns, whereas higher rates lead to falling prices of traditional fixed rate government and corporate bonds. This makes much of private debt a fantastic stabiliser when volatility is coming from interest rates, and a beneficial partner to traditional fixed income exposure.
In summary, the ability of private assets to diversify existing public investments can be a major attraction. In assessing this, differentiated return drivers should take precedence over statistics.
5. Provide more direct exposure to impact investing
In recent years, an increasing number of investors have become focussed on the impact they have with their investments. Private markets offer distinct advantages for creating and measuring impact in a more precise manner than is possible in public markets.
In private equity, for example, significant equity stakes and board representation grant investors the ability to directly influence a company's trajectory, which can include alignment with specific impact. For real estate, place-based impact investing (PBII) has a focus on outcomes like job creation and improved housing. Private assets, particularly in sectors like renewable energy, affordable housing, and sustainable agriculture, often have a direct link to impact objectives such as the United Nations Sustainable Development Goals (SDGs).
On the debt side, a clear example of the alignment of investments with impact is microfinancing, whereby microfinance institutions provide loans and (increasingly) savings, insurance and related products to groups with low-income, as well as micro, small and medium enterprises. These enable income-generating activities and help people to break out of poverty.
