The turbulent global events that have punctuated the past quarter of a century have by no means been shared equally, with the human cost of war a devastating case in point.
Yet the past 25 years illustrate how global crises are increasingly impacting a larger percentage of the population simultaneously in one way or another, with some dramatic moves in global markets along the way.
At a time when the Governments around the world are encouraging investment into private markets to boost growth and fund infrastructure, while also aiming to support their domestic equity markets, Aberdeen Investments looks at the public’s perception of private markets, and how they’ve performed against different asset classes over the past 25 years.
Dip in sentiment for private markets
Aberdeen research, looking at a UK sample, hints at some of the challenged in telling the private markets story. In the UK, a poll of 3,000 UK adults conducted by Opinium on behalf of Aberdeen Investments, suggested 40% would be happy for their pensions to include investments in private markets. That compares to 53% who were asked the same question a year ago*.
The dip in sentiment comes despite a lot of noise on private markets over the past year – illustrating the ongoing need for education. That said, with two‑fifths of adults still open to having private markets in their pensions, there is still a meaningful base of support
Interestingly, Aberdeen’s research shows that half (50%) of those aged 18-34 would be open for their pensions to include some investment in private markets, compared to 42% for those aged 35-54 and just 31% for those aged 55 and over.
Private markets outperform over long-term – but with higher risk
The research shows that a diversified, equally weight basked of private market assets has significantly outperformed traditional asset classes – equities, 60/40 strategies – and bonds – over the past 25 years. Crucially, though, this has been achieved through a higher risk profile, illustrating the importance of spreading risk.
An equally weighted basket of private market assets has delivered a total return of 845% over 25 years, compared to 359% for global equities, 190% for global bonds, and 309% for a traditional 60/40 portfolio over the past 25 years**.
Of course they have done so from a higher risk profile, and it is important to note that past performance is no guide to the future. Crucially, because of the volatility of various private market subsectors, Aberdeen looked at an equally weighted basket of private market assets, with the subsectors being private equity, infrastructure, real estate, private credit, and natural resources.
Nalaka De Silva, Head of Private Markets Solutions at Aberdeen Investments, said:
“It is clear there is more work to do in highlighting the significant benefits private markets can offer.
“The long-term nature of private market investments, even versus publicly listed shares or bonds, should mean investors can demand a higher level of return over the very long term.
“Over the past 25 years – a period encapsulating multiple market shocks including wars, tech crashes and the global financial crisis – performance data shows that private markets have significantly outperformed global equities, fixed income and traditional 60/40 strategies. However, this story isn’t yet well understood by the public.
“But the risks entailed by private markets is very different, and we are not suggesting that traditional portfolios of equities and bonds should be replaced. Every private market sub-segment has its own dynamics, so diversification is essential in mitigating risk within private markets as it is in public markets – which is why we looked at an equally weighted basket of private market assets.
“Current concerns around private credit are clearly warranted but remain focused on a few direct lending areas with valuation and transparency issues, particularly software heavy exposures. But these troubled pockets are small compared to the wide range of high-quality strategies available.
“From a portfolio construction viewpoint, this is exactly why a diversified exposure across credit and private markets matters — it is better able to tap resilient return streams while reducing reliance on any single segment.”
25 years of turmoil: private markets versus equities, bonds, and 60/40 strategies
Barriers and solutions
The ability for the wider public to access such potential returns remains limited, with a number of barriers still to overcome.
As Aberdeen highlighted in its recent whitepaper, ‘Private markets for public good: the opportunities and barriers to democratisation’, significant challenges to democratisation include the lack of daily dealing available with products such as LTAFs and ELTIFs, inconsistencies in how fees are reported, low levels of transparency in how private market assets are valued, as well as a lack of reliable benchmarking and reporting.
Boosting public confidence in private markets
To help boost public confidence in private markets and channel further investment into the asset class, Aberdeen believes there should be an open and honest conversation about risk and reward. The risks of private markets investing are inherently different to those of public markets and investors should go in with their eyes open.
In addition, Aberdeen says there needs to be a product-neutral approach to policy and regulation when it comes to private markets – an approach which understands that some vehicles will work better for certain types of investors than others.
This includes investment trusts, which are currently excluded from the reserve powers in the government’s proposed Pensions Schemes Bill, which aims to unlock private capital for investment in long-term productive assets and if required can compel pension schemes to invest in private assets.
Nalaka De Silva added:
“As private markets become a more central part of the pension landscape, it’s important we empower the public with clear, accessible information.
“If the Government wants the asset class to play a stronger role in supporting pensions and better retirement outcomes, education is one of the most powerful levers it can pull.”
Aberdeen reiterates 8-point plan to make private markets work for public good
While Aberdeen is not suggesting that traditional portfolios blending investments in equities and bonds should be replaced, it believes there is a real place for private markets in more portfolios. Aberdeen recently outlined its 8‑point plan to make private markets work better for the public good:
- Introduce a standardised template for reporting performance. This should include a time-weighted return as well as the IRR so investors can more easily compare returns with public market funds. Standardised reporting of performance should also mean that more reliable benchmarks can be created to compare returns of private market funds.
- Encourage greater transparency and levels of disclosure among private market funds, including over assets held, risk management strategies and how assets are being valued.
- Establish a gold standard for valuing private market assets covering how a private asset should be valued, how frequently and who will value it. This could take inspiration from the model that already exists in the real estate industry, overseen by RICS. We would also support the introduction of kite mark for private market funds showing that they follow “gold standard” practices for valuing their assets.
- Industry will need to collaborate to develop ways of integrating private market funds which cannot be traded daily into mainstream investment platforms and managed portfolios which are currently set up for daily dealing.
- Have an open and honest conversation about risk and reward. The risks of private markets investing are inherently different to those of public markets and investors should go in with their eyes open.
- Push forward conversations about value for money and introduce a standardised cost disclosure framework for both funds and funds of funds within private markets. The latter should easily allow investors to compare net-of-fee returns with public market equivalents.
- Countries should consider creating their own national taskforces to coordinate these conversations and deliver impactful education campaigns around private markets investing.
- Ensure a product-neutral approach is taken when it comes to policy and regulation – an approach which understands that some vehicles will work better for certain types of investors than others.
