The future of PCMs (Private Capital Markets) is filled with opportunities to drive long-term innovation, job creation, and growth. And if the accelerated adoption of technology in the industry can tell us anything, it’s that transformational change in PCMs is here to stay.
So how can PE/VCs capitalize on the current environment while future-proofing their PCM investing strategies? It starts by gaining an understanding of where the market is headed.
To give you a head-start, we’ve rounded up seven trends shaping the future direction of PCMs so you can make the most of the opportunities emerging and set your firm up to thrive through faster, more sustainable growth.
Let’s dive into it!
Seven Trends Shaping The Future Direction of PCMs
- Diversity & Inclusion and ESG Will Matter Even More, Especially in Recruiting
Diversity & Inclusion (D&I) is no longer a “nice-to-have” – it’s now a critical piece of a firm’s due diligence and investment strategy. 20% of LPs or investors have refused to move forward with an investment opportunity in the past due to a lack of commitment to D&I.
But D&I isn’t just crucial for fundraising. With the employee shortage only increasing since the COVID-19 pandemic, securing top talent while aligning to D&I due diligence remains an increasing priority for LPs.
Additionally, companies with ESG integration within private markets will continue to emerge as an integral part of aligning brand and employee values—a critical piece to growing (and maintaining) employee retention and satisfaction rates in today’s competitive talent market.
- Interest to Grow in Resilient Private Markets
Interest and investments in resilient private markets are only going to increase. As of 2021, PEs raised about $535 billion, with 93% of investors anticipating investing even more in private equity over the next 12 months in asset classes like art, litigation finance/non-fungible tokens, and leased aircraft.
- Co-investing to Chase Fewer Deals
It’s no secret – sourcing deals has become even more challenging as new competition pops up. To continue generating returns, there’s been a push for PEs to get creative, resulting in a rise in co-investment strategies.
By bringing on a co-investor, firms are able to invest more in private markets, while reducing the competition amongst deals they may not have been able to secure otherwise.
- Secondary Markets Continue to Grow
Single asset secondaries, which are akin to co-investments, are gaining traction in PCMs,
thanks to the combined pressure of tight LP allocations and a volatile market.
As of mid-2022, 52% of LPs have invested (or plan to invest) in secondary markets to provide solutions like liquidity for LPs or maximize the value of a fund’s assets by extending the deal term.
- Due Diligence and Fund-Raising to Get a Virtual Boost
Virtual communication is here to stay, unlocking an opportunity for managers to gain access to operations and compliance team members earlier on in the deal cycle. This gives all parties more transparency on who they may work with throughout the fundraise.
However, this is still an industry founded on relationships, so while most LPs plan to adopt a hybrid model, they still rely on face-to-face meetings for due diligence and relationship building.
- A More Testing Fundraising Environment
With in-person meetings restricted during the pandemic, established managers who were able to tap into existing relationships emerged as the biggest beneficiaries. Lesser known groups, on the other hand, had to rely on strong first impressions—something difficult to do in a virtual-only setting.
But these smaller groups’ luck may be looking up. As those established LPs have started to max out and over-allocate, experts are projecting rockier grounds and more competition ahead for future fundraises.
- PE’s Investor Base Could Widen
Thanks to regulatory changes helping to ease investor access to illiquid assets, we can expect to see expansions of PE’s investor base. Almost half of all PEs are seeking to increase capital raised from additional industries, like wealth and retail channels, in the next few years.
But, with uncharted waters comes the risk of not knowing whether returns will out-match costs. As with any trend, only time will truly tell.
Tune in to Stay Ahead of the Trends
The trends shaping the future of PCMs present both opportunities and challenges ahead for firms.
To stay abreast of the rapid changes and trends, and maintain your competitive edge in the market, subscribe to Altvia’s Preferred Return Podcast on Apple or wherever you get your podcasts.