Private markets have grown by 170 percent ($4 trillion) in the past decade alone. They are now a bedrock asset class for investors seeking higher returns and less correlation with traditional asset classes.
The rise of “private capital” is driving further growth: UHNWIs are predicted to increase by 27% over the next five years, while the number of HNWIs is expected to grow by 41% over the same timeframe. These wealthy investors are increasingly turning to private markets as a way to generate alpha, or outperformance, relative to public markets.
Why HNWIs turn to private markets
There are many reasons why private markets have become so popular with HNWIs. One is that the global pool of investable assets has grown increasingly large and liquid, making it easier for investors to put their money to work in these assets.
Many HNWIs are seeking investments that offer the potential for higher returns than what is available in public markets. With inflation remaining at over twice the Fed’s goal rate, private markets have become an attractive option for yield-seeking investors. Further driving this crossover between private equity and private wealth is that most economists predict a recession, driving investors out of the tumultuous public markets.
In addition, the globalization of the economy has led to more opportunities for private companies to scale up quickly and become world-class businesses. This has created a more favorable environment for PE and VC investing.
Simply put, HNWIs are finding that they must allocate a larger portion of their portfolios to alternative assets to maintain their desired level of return. This has meant turning to private equity and other private market investments for many.
Creation of HNWIs by private equity
Private equity firms have been increasingly successful in creating wealth for their investors over the past few years. This has led to a growing number of HNWIs within the PE ecosystem.
Moreover, management teams have benefitted from the increased value of their companies, often receiving a significant portion of their compensation in the form of equity. This has led to an increase in the number of HNWIs globally.
Many HNWIs are also investing directly in private equity firms through limited partnerships or co-investment vehicles. This allows them to gain exposure to a wide variety of PE firms and strategies, while also benefiting from the scale and expertise of these firms.
HNWIs selling businesses to private equity
Another area of synergy between private equity and private wealth is the sale of businesses to PE firms. As HNWIs look to exit their businesses, they often find that PE firms are willing to pay premium prices for these companies.
This provides HNWIs with an attractive exit option and also allows them to maintain a minority stake in their business, which can provide them with ongoing income.
What does the future hold?
The crossover between private equity and private wealth is likely to continue in the years ahead, as HNWIs seek higher returns and look for ways to diversify their portfolios.
Private markets are expected to grow faster than public markets over the next decade, making them an increasingly important asset class for HNWIs. Accessing these opportunities, however, still often comes with high capital requirements, making it difficult for many HNWIs to build properly diversified portfolios.
This is where Gridline comes in. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.