Rate rises create a challenging environment for private markets funds

Year 2023 has a “much more challenging” fundraising environment for private markets products, according to J.P. Morgan Asset Management (JPMAM).

Previously, private markets had done well from a low interest rate environment as investors sought a way to get income without going into high yield bonds and for diversification purposes due to their uncorrelated nature. 

Brandon Robinson, deputy global head of alternatives, said: “2023 has been a much more challenging environment as people can get returns from bonds now, we have been bought back down to earth,” Robinson said.

“In 2021, [the sector] raised US$1.6 trillion. But this year, we’ll be lucky to reach US$1 trillion; private credit has been hit hard.”

VIEW ALL

View all

However, Robinson acknowledged the multi-year low rate environment has successfully helped to boost investors’ awareness of alternatives, an area that is traditionally a focus for institutions rather than retail investors. Rather than the traditional portfolio structure of 60 per cent equities and 40 per cent bonds, he said he is now seeing portfolios structured as 50 per cent equities, 30 per cent bonds and 20 per cent alternatives. 

“The diversification benefits of them are becoming clear for private wealth individuals that they can get a better risk-adjusted return from holding alternatives with lower volatility.

“They have stood the test of time.”

He said one area where individuals are seeing the benefits of private markets, particularly in semi-liquid products, is around the intergenerational wealth transfer where the money is not required for several years.

Traditional private markets products require money to be ‘locked up’ for 10–15 years, which has previously deterred individual investors, but newer semi-liquid products only require five to seven years. 

An estimated $3.5 trillion is expected to be transferred between generations over the next 20 years.  

“Individuals used to hold around 4 per cent but now they might hold as much as 10 per cent with the change in regulation and the creation of semi-liquid products. When the regulations shifted and people were able to design semi-liquid products, then individuals were more willing to look at them.”

Semi-liquid products are a relatively new hybrid creation that allow investors to get a portion of their money back, and Robinson said there are geographic differences in their popularity. 

“In the US, it used to be all about illiquid products, and now they are looking at semi-liquid too. In Europe, they are only now looking at semi-liquid as the legislation is very new; they are testing the water there so we are trying to gauge demand. In Australia, they are slowly moving that way and we are getting asked more about them.”