As higher interest rates bite, here are 5 private market investment trends to expect in 2024

• Private capital is used to fund all kinds of enterprises throughout the economy – from real estate and infrastructure companies to ventures working on AI and the energy transition.
• Attendees at the 2024 Annual Meeting of the World Economic Forum in Davos discussed the changing environment for this growing sector, particularly as central banks around the world have raised interest rates from near-zero levels to tackle inflation.
• Discussions covered the politicization of the financial markets, giving retail investors access to private market opportunities and the growth of private debt.

The low interest rate era of recent decades encouraged a flood of investment capital to the private markets space. This has allowed fund managers to raise funds and borrow cheaply, while enabling companies to stay private for longer rather than seeking a listing on a public exchange.

Assets under management nearly tripled between 2015 and 2022, growing from $4.5 trillion to $13.4 trillion – or about 10% of global capital under management. Private capital is now used to finance every type of enterprise in the real economy. It spurs innovation via venture funding of startups, provides non-bank lending lines through private credit and supports the development of long-term projects in real estate and infrastructure.

It is also fuelling innovation in new markets like sustainable energy and generative artificial intelligence (genAI). In the 12 months following the 2022 passage of the US Inflation Reduction Act, for example, $496 billion in private capital was raised for the energy transition, while $50 billion was raised for genAI in 2023. This funding has a tremendous impact across the global economy.

But the recent shift by many central banks to a higher-for-longer interest rate regime has slowed down fundraising in this sector. As a result, large asset allocators such as pension funds are now prioritizing liquidity needs, changing their capital allocations as valuations and return expectations adjust, while fund mangers are looking at new ways to create value.

Such changes were explored throughout the programme at the 2024 Annual Meeting of the World Economic Forum in Davos, and five key insights emerged about the future of private markets.

1. Fundamentals over financialization

Despite a recent slowdown in fundraising and deal activity, there is still a record amount of dry powder – or uninvested capital – to be deployed across all asset classes. But, as interest rates stabilize, private investors are turning their attention from shorter term liquidity needs back to longer term value creation strategies, focusing on how operational expertise can deliver margin growth, not just multiple expansion.

Far fewer companies can continue to be profitable or competitive in the current interest rate environment. This means investors will have to be discerning with their targets and focus on strategic portfolio operations and human capital management.

2. IPOs are not for everyone

Global IPO activity (when a company lists on a publicly traded exchange such as NYSE) has fallen in recent years. Listing on an exchange is one way to pay investors back and get access to more capital or send a signal to the market about the stability or credibility of the company.

Going public is not the right path for every growing company, however. Many are not ready for the disclosures or the volatility of listing on a public exchange. They may benefit from staying private, especially if they have access to enough capital or revenue to continue operating at today’s higher cost of borrowing. This is where the secondaries market – which has also boomed as IPO activity has stalled – can help by providing opportunities to sell stakes or entire companies between private funds.

In an example of bridging the gap of listing-readiness, the Hong Kong Stock Exchange has adapted the listing requirements for its Growth Enterprise Market. This helps small and medium enterprises to access liquidity and transition to the main exchange via slightly different requirements for reporting, market capitalization and lock ups (when shareholders are restricted from selling shares for a certain period post-IPO).

This Article was first published on World Economic Forum and is republished under the Creative Commons Licence