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The Company of the Future Is Private

To invest in 30-year economic trends like artificial intelligence, allocators overwhelmingly favor private markets over public, according to a new survey.

By 2050, if not long before, public companies will be big yawners. Pension funds, endowments, and other institutions that want to profit from long-term economic and technology trends are betting that private companies will be the primary innovators, according to a new survey released Thursday.

The majority of institutional investors believe the top investing trends over the next 30 years will be an aging population and artificial intelligence. To capitalize on the economic implications of these far-reaching transformations, which also include the impact of climate change, they’ll primarily be putting their money to work in private markets, including private equity and real estate. 

According to the survey from asset manager Investcorp, Mercury Capital Advisors, IMD Business School, and communications advisory firm ICR, 78 percent of institutional investors see the shift in demographics and an aging population as the most significant trend that will affect how they invest over the next three decades. Sixty nine percent of investors said artificial intelligence and machine learning was the most important, while 66 percent of respondents pointed to the impact of climate change. 

Given the 30-year time frame for some of the trends, respondents believed that private companies are best positioned to react to big changes. The survey included the responses of almost 200 investors, including pensions, sovereign wealth funds, foundations, and endowments, representing about $10 trillion in assets.

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“We were pleasantly surprised about the time frame,” Rishi Kapoor, co-CEO of Investcorp, said in an interview. “Many of these senior decision makers want to get exposure to these trends in the next five to 10 years.” Kapoor explained that it’s the first time the four firms have collaborated on this survey, but that they plan to do it annually from here to have a history of investors’ perceptions and insights. 

Kapoor emphasized that he wasn’t surprised by the investors favoring private markets.

“By definition, trends that tend to be super secular and long term in nature are better captured by domain specialists in each of those arenas, rather than through broad-based beta exposure in public markets,” he said. “Public companies’ value can be driven by sentiment as much as anything else.”

Respondents to the survey said they would invest in these top trends through third-party asset managers, not through direct investments. Kapoor said this finding, which was part of the larger survey and not yet public, made sense given the relatively new nature of the trends themselves. “They’re saying that for this, it’s better to go through a manager that knows the underlying space,” he said.

When it came to an aging population, 62 percent of investors said they were investing in the trend through private markets — including private equity and real estate — while 26 percent were targeting public markets. Investors said the demographic changes would peak around 2030 to 2032.

Kapoor noted that many of the trends, such as aging populations, can be implemented as investment ideas in many different ways. Health care, long-term savings products, and life insurance, for instance, can be invested in through private equity funds, he said, whereas senior living and other assisted care services are real estate plays. Kapoor said Investcorp’s last four private equity deals have all been related to health care. 

With AI and machine learning, participants in the survey were more than twice as likely to invest through private equity and real estate compared to public markets. Among those respondents who were targeting private markets for AI exposure, 44 percent preferred venture capital. Thirty-four percent preferred private equity investments in AI. Kapoor noted that AI affects the way almost all businesses operate, and isn't limited to certain sectors. 

Forty-eight percent of allocators who put money to work in projects impacted by climate change chose private equity, versus 27 percent who chose public markets. Within private markets, 28 percent had deployed capital through private equity, 25 percent had chosen infrastructure, 21 percent were using venture capital investments, and 15 percent preferred real estate. 

Other top 10 trends identified by big investors in the survey were urbanization and smart cities, as well as the redefinition of global trade.

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