Public market sell-offs have put downward pressure on the pricing of private assets. But according to AllianceBernstein, the asset class is still a smart play for long-term investors. 

Inigo Fraser-Jenkins, co-head of institutional solution at the $647 billion asset manager, thinks the private markets will play a critical role in a world where inflation remains a top concern. “Inflation is not going back to pre-pandemic level,” he said. Private assets like real estate, infrastructure, farmland, and private debt will offer protection against prolonged periods of inflation, according to Fraser-Jenkins. 

Fraser-Jenkins also thinks private assets can provide diversification benefits that are no longer available in traditional stock and bond portfolios. “In the last 20 to 25 years, the assumption that bonds and equities have a negative correlation is just the key engine of diversification for portfolios, especially for pension plans. We simply don’t think that’s going to last,” Fraser-Jenkins said. “[Inflation] forces asset allocators to think, in strategic terms, about where to get diversification from.”

In his view, private assets are a perfect source of diversification beyond traditional public market portfolios. Private debt, for example, protects investors from persistent inflation by offering floating-rate coupons that rise in line with interest rates. Farmland and timberland, which are not available to investors in the public markets, will also generate positive returns in an inflationary environment. And real estate and infrastructure will provide investors with payments that are linked to the real economy, and are thus inflation-proof.

“I don’t want to put private markets on a complete pedestal… but certainly there are areas of return streams, which either serve as diversification or protection against inflation,” Fraser-Jenkins said.

He added that real assets can also help investors outperform in their environmental, social, and governance investments. Renewable energy, for example, returned 141 percent over the year ending in June 2022, according to AB’s midyear outlook.

But private equity will not be an ideal candidate for significant asset allocation in the long term, according to Fraser-Jenkins. The most popular private asset class had a banner year in 2021, driving valuations to record-highs that will make it more difficult for managers to deliver profits going forward. AB expects the average private equity returns to be in line with public stocks after accounting for their higher fees. 

In the long term, Fraser-Jenkins expects marginal flows into the private markets to head into areas other than private equity. 

“I just worry the average return on the average private equity investment is going to disappoint investors,” he said.