Can Private Markets Resist the Bear Market in Stocks?

As stock markets stumble, will the trillions of dollars that have flowed into private markets be a haven from the turmoil?

That question looms large as the market for assets that aren’t publicly traded has roughly doubled in the past five years to about $10 trillion, according to data from consulting firm McKinsey & Co. and data provider Preqin. Private equity — including leveraged buyouts and venture capital — is the biggest chunk of that market, but it also includes infrastructure and private credit, and the money is flowing into everything from tech startups to buyouts to airports.

There are signs that fundraising has cooled slightly, but it’s far from drying up. Globally for the first half of this year, the number of series-stage deals that are larger than $100 million has fallen 8% and the volume of capital raised through those deals has fallen 22% compared with 2021. This is still some 55% and 28% more than the five-year average, respectively, according to PitchBook, a data provider.

As the S&P 500 Index dips into a bear market, “private markets aren’t immune from the volatility,” says Gaurav Mathur, Head of U.S. Equity Private Markets in the Investment Banking Division at Goldman Sachs. Much depends on the type of investor and the company’s stage of capital raising, though some reports suggest raising private capital is getting more difficult.

Hedge funds and mutual funds that invest in private and public markets have a bigger footprint among late-stage companies these days. These crossovers invested in deals representing 42% of aggregate value compared to an average of 24% over the prior decade, PitchBook data show. This indicates that part of the market is more correlated with public markets than it used to be.

Some of the capital has shifted to earlier- and mid-stage companies that have a longer timeline before they are expected to become a public company. And while hedge funds get many of the news headlines, pensions, sovereign wealth funds and family offices — which may have a longer time horizon for investments — are also a core part of the private-market ecosystem.

“Companies advancing the technological revolution can be financed by patient capital, though there is a heightened focus on valuation and timelines to important milestones,” Mathur says.

As equity prices gyrate, interest has also grown in structured equity and structured credit (which has attributes of debt as well as equity). Some investors are more open to convertible notes, because, unlike pure equity, they are more debt-like securities and offer some downside protection if equity prices fall. For the executives who issue them, convertibles provide another option to finance the balance sheet in a volatile market. “The amount of money raised for structured securities has allowed issuers to access diverse pockets of capital,” Mathur says.

Those options are available because of the amount of funds that have flowed into private markets from varying types of investors. The dry powder that investors have raised for private investments has soared nearly 40% since before the pandemic to a record $3.5 trillion, according to Preqin.

Another important change in private markets is that there’s a growing secondary market. That gives investors and employees more flexibility than they had before. “The market can observe where some companies’ shares are trading,” Mathur says. “You couldn’t do that as readily five years ago.”