Where Might You Find Returns In 2019? Consider Private Markets

How much of your portfolio is allocated to private markets? How big is the total opportunity set? Here are a couple of stats to get your attention:

  • As of Q4 2018, there were nearly 200,000 middle-market companies just in the U.S., with $10 million to $1 billion in annual revenue1, yet there were less than 3,600 publicly traded companies in the U.S. at the end of last year.2
  • Considered alone, these privately held middle-market companies would represent the third largest economy globally, trumping the economies of Japan and Germany.

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U.S. middle markets by GDP

Source: Russell Investments, National Center for the Middle Market, 3Q 2017, Dun and Bradstreet Middle Market Index.

Private markets don’t just represent an economic force. They represent an equally potentially significant investment opportunity, with all the potential risks and upsides that come with such scale. When it comes to upside potential, we believe the return and volatility profiles from this sector are increasingly attractive, particularly in the current environment. We’re not alone. That potential has attracted a significant amount of capital to the space, with good reason.

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Growth of 100 dollars

VC: Venture Capital. RE: Real Estate. BAML US HY TR: BAML U.S. High Yield Total Return Index. FoF & Secondary: FOF (Venture and Private Equity) and Secondary Funds.

And when it comes to risk, it’s clear that navigating this space is no simple task. Take private capital as an example: The dispersion of returns—from top to bottom quartile—continues to be wide. For example, in 2015, the top quartile of private capital outperformed the bottom by nearly three times.3 We believe this dispersion underlines the importance of working with skilled managers who can navigate the risk landscape.

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Buyout chart

Despite the navigational challenges, growth in this sector continues. In the last few years, we’ve seen some of the highest commitments to private markets ever, with over $4.2 trillion raised across private markets from 2014 through the end of 2018.4 At the same time, private-markets dry powder numbers (capital committed to funds that has yet to be deployed in opportunities) have more than doubled, from $1.0 trillion in 2010 to $2.2 trillion in 2018.5 Total private markets AUM—the combination of unrealized values AND dry powder—totaled some $5.8 trillion, as of June 2018.6

The illiquidity premium

So where might investors potentially look for returns in 2019? At Russell Investments, we firmly believe that private markets may represent a salve to the low-return environment of public markets. Despite increases in capital flows to the space, a variety of opportunities persist, given the structural advantages that closed-end, long-term, illiquid structures allow skilled investment managers to pursue. Possibilities remain in all sub-asset classes, including:

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Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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