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Key Takeaways

  • Private markets involve transactions among non-listed businesses. These transactions include debt and equity investments in private companies or assets, and real assets such as infrastructure and real estate.
  • Private markets assets under management (AUM) totaled $11.87 trillion in 2023, up from $10.89 trillion in 2022 and $10 trillion in 2021.
  • Private equity investments account for over half of private market investments but private credit/debt and real assets are growing rapidly.
  • Private markets are projected to reach more than $15 trillion by 2025, and more than $18 trillion by 2027.
  • Private markets are likely to continue growing in 2024, but more slowly.
  • Alternative investment funds are likely to expand in both number and leverage.

What are Private Markets and how do they work?

Private capital markets, also known as private markets, refer to debt and equity investments in privately owned companies, as opposed to assets traded publicly, such as stock exchanges, the bond market, and commodities markets.

Private markets allow investors to put money into private companies in the form of private debt or private equity, or into real assets such as infrastructure, natural resources, or real estate. In return, investors receive a share in the company or asset/s and stand to make a positive return if the company performs well or the value of the asset(s) appreciates. Conversely, they also risk losing capital if the company fails or the assets depreciate. Private debt investors do not get a share in the company to which they are lending money, but they stand to gain from the interest charged on these loans. 

Private markets help companies launch by giving them access to much-needed capital, while also providing investors with opportunities to achieve a potentially better return than they would through public markets.

Investors are increasingly turning to the private capital markets for better returns, as these investments have outperformed public securities in recent years.

A Short History of Private Markets

The first private market transaction is thought to have taken place in Amsterdam in the early 1600s when a company called the Dutch East India Company raised money from private investors to fund its voyages to the Far East.

In the 1900s, private markets surged in popularity as a way for companies to raise money, partly due to the development of new investment mediums such as private equity and venture capital, which allowed investors to put money into private companies.

As private markets grew in popularity, several regulatory bodies began to emerge to help protect investors and ensure that companies were being truthful about their financials. The most notable of these was the Securities and Exchange Commission (SEC), created in 1934.

By the end of the 1960s, private companies had raised over $1 billion in capital through private markets, and private markets were an increasingly important part of the economy. The 1990s saw the expansion of private markets into new geographies, with a surge of activity in countries like China and India  This was helped by the growth of the internet, which made it easier for companies to raise money from investors around the world.

Today, private markets account for trillions of dollars in investments, and they continue to grow in importance. Private markets are an important part of the global economy and are estimated to be worth an estimated $11.87 trillion as of late 2023.

Private Market Asset Classes

There are several private markets asset classes that investors can use to access private companies, including private equity, private credit/debt, and real assets.

Private Equity

Private equity refers to the purchase and sale of ownership stakes in private companies. Private equity investments are made by private equity firms that raise investment funds pooling money from investors and use it to buy stakes in private companies.

There are several different types of private equity, including:

  • Fund of Funds
  • Growth Equity
  • Leveraged Buyouts (LBOs)
  • Mezzanine Capital
  • Real Estate Private Equity (REPE)
  • Venture Capital (VC)

Private equity vs private markets: what’s the difference?

Private equity is a subset of private markets. Private markets broadly refer to investments made in assets not available on public exchanges, including private companies, debt and real assets, while private equity specifically refers to investments made in private companies. 

Private Debt

Private debt is a type of private market asset class that refers to the purchase and sale of loans and debt securities in private companies. It is often used interchangeably with private credit, which is actually a subset of the private debt asset class. There are several forms of private debt, including:

  • Direct lending – a form of financing provided directly by a lender to a borrower, without the involvement of a bank or other intermediary. Direct lenders typically focus on providing loans to small and medium-sized businesses (SMBs) and borrowers considered speculative/non-investment grade.
  • Distressed debt – provided directly by a lender to a borrower, without the involvement of a bank or other financial intermediary. Direct lenders typically focus on providing loans to small and medium-sized businesses (SMBs) and other borrowers considered to be below investment grade.
  • Mezzanine debt – a combination of senior debt and equity, often used to finance leveraged buyouts or other transactions where the borrower's credit rating is not strong enough to qualify for senior debt.
  • Private debt fund of funds – a type of investment fund that invests in other private debt funds and offer investors the opportunity to gain exposure to a diversified portfolio of private debt investments, without having to invest directly in individual debt.
  • Venture debt – provided to early-stage companies by venture capital firms, it is typically used to bridge the gap between a company's initial round of funding and its next round of financing. Venture debt lenders typically have a lower interest rate than traditional banks, but they also have a higher risk of default.

Real Assets

Real assets investing is the purchase of physical assets, such as real estate, infrastructure, and natural resources. Real assets can provide investors with stability and long-term returns, as they are not as volatile as traditional financial assets such as stocks and bonds.

There are several different types of real asset investments, including:

  • Real Estate : the purchase of property such as offices, retail space, apartments, and industrial buildings. Private equity real estate investments can provide investors with stability and long-term returns, as they are not as volatile as traditional financial assets such as stocks and bonds. Real estate investments can be made through private real estate funds or public real estate markets.
  • Infrastructure: a type of physical asset that refers to the purchase of transportation networks (e.g. roads, bridges, airports), communication networks (e.g. telecommunications networks, data centers), or utility systems (e.g. water treatment plants, energy pipelines). Private Market Infrastructure investments can provide investors with stability and long-term returns, as they are not as volatile as traditional financial assets such as stocks and bonds. Infrastructure investments can be made through private infrastructure funds or public infrastructure markets.
  • Natural Resources: the purchase of commodities such as oil, gas, coal, gold, silver, and copper. Private market natural resources investments can be made through private natural resources funds or public natural resources markets. Each investment type has its unique characteristics and benefits. Natural resources can provide investors with stability and long-term returns, as they are not as volatile as traditional financial assets such as stocks and bonds.

What is Private Market Investing?

Private market investors are typically institutional investors such as pension funds and insurance companies. Private market investments are typically made via a private markets fund arranged as limited partnerships, with investors referred to as Limited Partners, or LPs, and investment managers referred to as General Partners, or GPs.

The Private Markets Lifecycle

 A typical private equity fund’s lifecycle is between seven and 10 years, although the exact timeline can vary depending on a fund's investment strategy and market conditions. It typically consists of five stages:

  1. Fundraising
  2. Capital deployment
  3. Portfolio monitoring
  4. Portfolio administration
  5. Value realization
During private market fundraising, the general partner (GP) of a private equity fund raises capital from institutional investors, such as pension funds, endowments, and insurance companies. This process can often take several years.

Once the private fund has been raised, the GP will begin capital deployment: investing in portfolio companies. These companies can be at any stage of development, from early-stage startups to mature businesses.

During portfolio monitoring, a GP will work closely with the portfolio companies to help them grow and improve their performance. This could involve providing strategic guidance, operational support, and further capital.

Portfolio administration involves managing the day-to-day operations of a private equity fund's portfolio, including tracking investment performance, monitoring portfolio companies, managing capital calls and distributions, preparing financial reports, and complying with regulatory requirements.

Value realization, also known as an exit, happens once a GP believes that a portfolio company has reached its full potential. An exit is typically done through an IPO, sale to another company, or recapitalization.

Once a GP has exited all of the investments in a fund, the fund is liquidated and the proceeds are returned to investors.

 

What are some of the potential benefits of private markets investing?

For Investors:

  1. Higher potential returns. Private equity has typically outperformed public markets over a long term time horizon.
  2. They offer investors the opportunity to get in on the ground floor of promising companies.
  3. Diversification. The bulk of the economy consists of public market investments, so the private markets offer access to a alternative sources of risk and return. 

For Companies:

Private investment can provide vital capital for companies, including start-ups seeking growth.  The decline in both the availability of bank finance and public companies leaves more private companies seeking investment capital.

For Governments:

  1. Help governments to meet objectives on infrastructure and net zero initiatives.
  2. Allow governments to create jobs while simultaneously reducing public spending.

Private Markets Regulation

How Are Private Markets Regulated?

In the U.S., debt and equity investments in private companies are subject to Regulation D of the Securities and Exchange Act of 1933. Codified in 1982, Regulation D  prescribes the qualifications needed to meet exemptions from registration requirements to issue securities. Generally speaking, they are that all sales within a certain time period that are part of the same Reg D requirement must be treated as one offering; information and disclosures must be provided; there must be no general solicitation, and the securities being sold contain restrictions on their resale.  

Private market funds targeting investors in Europe are subject to the Alternative Investment Fund Manager Directive (AIFMD), which was drawn up in response to the global financial crisis and implemented in 2013. It sets the standards for marketing a private markets investment fund, remuneration policies, risk monitoring and reporting as well as overall accountability. Its primary goal is to protect investors an reduce some of the systemic risk these funds can pose to the economy. 

A second iteration of the directive, introduced in 2024, states that AIFMs cannot grant loans with a notional aggregate value of 20% of a fund’s total capital to a single borrower that meets a range of requirements. This rule may affect private credit managers.

Private Markets vs Public Market Investing

What’s the difference between private vs public market investing?

Private market investing and public market investing each  offer a range of benefits to market participants, but there are many differences in private markets vs public markets including their regulation, liquidity and information availability.

Private vs public markets: a quick comparison

Characteristic

Private Markets

Public Markets

Accessibility
Restricted to accredited and institutional investors
Open to all investor types
Liquidity
Illiquid, meaning it can be difficult to sell assets quickly
Liquid, meaning assets can be easily bought and sold
Transparency
Less information available to investors,
More transparent, with more information available to investors
Regulation
Less regulated than public markets
Highly regulated
Fees and investment minimums
Typically higher fees and investment minimums than public markets
Typically have lower fees than private markets
Potential returns
Typically higher returns than public markets. Average U.S. private equity return was 10.5% from 2002-2022.
The S&P 500, widely regarded as the best single gauge of large-cap U.S. equities, provided an average return of 9.8% from 2002-2022.
Market size
Approx. $11.87 trillion in 2022
Approx. $125 trillion in 2022

Private Market Size

How big are private markets in terms of assets under management (AUM)?

As of 2023, private markets, excluding venture capital andhedge funds, assets under management (AUM) totaled more than $12.4 trillion globally as of 2023, up from $10.7 trillion at the end of 2022. There was an additional $3 trillion in dry powder – cash  committed by investors but has yet to be allocated to specific investments.

Private markets growth can be attributed to increasing demand from investors for high-yield and private equity investments, as well as the growth of private credit/debt markets.

Private Market AUM by Region

More than half of global private markets AUM, over $7 trillion, is invested in North America, followed by Europe with $2.67 trillion and Asia-Pacific with $1.38 trillion.

Region

AUM (USD trillion), 2022

AUM (USD trillion), 2023

Percentage of global private capital AUM, 2023

2022 to 2023 growth

North America
6.61
7.29
61.3%
10.2%
Europe
2.46
2.67
22.5%
8.5%
Asia Pacific
1.32
1.38
11.6%
4.3%
Rest of World
0.2
0.251
2.1%
6.6%
Total
10.89
11.87
100%
9%

Private Market AUM by asset class

Private equity remains the largest private market asset class with global AUM of $5.3 trillion as of 2023, followed by private debt ($1.63 trillion) and real assets ($4.52 trillion).

Asset Class

AUM (USD trillion), 2022

AUM (USD trillion), 2023

2022 to 2023 growth

Percentage of total alternatives AUM, 2023

Private Equity
4.83
5.3
9.8%
32.5%
Private Debt
1.47
1.63
10.9%
10%
Real Assets (Real estate, infrastructure, and natural resources)
4.26
4.52
6.7%
24.1%

Private markets are projected to reach more than $15 trillion by 2025, and more than $18 trillion by 2027. The strong growth of private credit/debt, real assets, and secondary markets  is expected to continue.

Private equity outlook

Many of the private equity trends seen in 2023 are expected to continue in 2024, including slow fundraising, elevated interest rates, a macroeconomic outlook clouded by conflict and geopolitical tension, according to S&P Global Market Intelligence’s private equity 2024 outlook.

Private equity exits fell sharply from 2022 to 2023, but there were signs of a rebound in late 2023. his is positive news for PE markets, the difficult deal environment won’t disappear overnight and as of November 2023, the number of PE entries were tracking for their lowest annual total since at least 2019. There is, however, a record $2.59 trillion in record dry powder waiting to be committed.

Creative deal structures and a relentless focus on value creation in private equity portfolios could be critical in the coming year.

Private debt outlook

Private debt markets are projected to continue growing, albeit at a slower pace, in 2024, due to uncertain interest rates and the possibility of a US recession.

Larger issuers, middle-market, and private credit CLOs are expected to intensify activity, with alternative investment funds (AIFs) expanding in both number and leverage. Business development companies (BDCs) may encounter volatile valuations, and certain portfolio companies could struggle due to earnings pressure and higher interest costs. Speculative-grade issuers may have trouble servicing debt in the face of rising costs and strained earnings, which will turn challenges for borrowers into opportunities for lenders.

Both General Partner (GP)- and Limited Partner (LP)-led secondary strategies are expected to be in high demand, and valuations in private markets may become more volatile due to the macroeconomic environment.

Real assets outlook

Infrastructure and real estate fundraising fell from 2022 to 2023. Global infrastructure fundraising hit its lowest level in six years, while real estate fundraising and deal flow decreased to new post-COVID lows.

For real estate, higher interest rates, weak office demand and falling property valuations pose significant risks in 2024. Office and retail real estate could come under stress following the rise of home working since the pandemic, pushing workers away from urban centers. An upcoming wave of refinancing could further impact the value of investments and transaction activity.

Rising interest rates and an economic slowdown have made capital more expensive and scarce, driving an overall decline in infrastructure fundraising, but global megatrends such as digitalization, decarbonization and deglobalization are driving new infrastructure investment opportunities.

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