For well over a decade, institutional investors have poured capital into private markets, turning what was once a relatively small corner of the market into a multi-trillion-dollar industry. Now, some leading allocators may be pulling back, at least according to a senior leader at one big asset manager.
Carlo Venes, co-head of the global client group at Dimensional Fund Advisers, said that while the trend is all “private, private, private,” there are some very large funds, primarily sovereign, that are slowing down the rate of investment into the space.
“It’s probably different than what you read in the news,” he said. “Accounts that I would consider lead indicators in the institutional space globally, that have been investing in primarily private markets for decades, so this is not new to them — many of them have told us that they have pushed the brakes and are actually increasing their public market exposures.”
These institutional investors include large sovereign wealth funds, public pensions, and insurance companies: allocators that have tilted portfolios towards the private market for many years. Geographically, Dimensional said the trend is evident across Asia-Pacific, the Middle East, Europe, and North America.
According to Venes, even funds that traditionally have not had much exposure to public markets are turning their attention away from purely real assets and alternatives, instead choosing to “diversify to public equities.”
In conversations with several other executives on this topic, there is agreement in principle. However, the necessary data to stand up the trend is yet to surface. Recent surveys show that record volumes are still being deployed into private equity, though that data could be skewed by the types of respondents such research attracts.
Dimensional does not think that there will be a reversal of the current trend or a dramatic fire sale and reduction in private market allocations. The expectation is more that the rate of adoption will slow down for the most sophisticated institutions. As new money comes in, institutions may invest it in public markets, added Venes. And, with global private capital assets hitting $22 trillion last year, according to McKinsey, investors’ portfolios are saturated.
Some institutions have deeper concerns about parts of the private markets. Singapore’s GIC sovereign wealth fund, for example, last week expressed caution about the ascension of private credit because of shrinking yield and the relative lack of experience that the market has with defaults. The comments are just the latest in a string of alarms raised about private credit.
There are clearly downsides with the illiquid assets. Yale’s endowment announced intentions to sell nearly $3 billion in private equity investments in June, amid pressure from the Trump administration’s federal funding cuts. The university has long been considered a pioneer of private market investment, but poor returns and a liquidity crunch mean the endowment has opted to sell at a discount.
Sébastien Page, head of global multi-asset at T. Rowe Price, said that in conversations with endowments and certain public funds, the firm has seen a similar trend to the one pointed out by Dimensional. These groups have a need for liquidity and are realizing in real time that it is hard to get that from private assets. However, the structure of the markets has changed and there are significantly less public companies trading today.
“Companies staying private longer has structurally hurt the publicly traded small caps, and moreover has helped the mega caps, because they can buy the private companies and hoover up those growth engines,” he said, adding that this has impacted risk premiums across the board.
