Covid-19 has been changing the private market from what was generally seen as a defensive asset class to a highly dynamic investment sector with strong growth prospects.

In the wake of the pandemic, growth prospects for private markets appear even stronger, although capturing such opportunities may be more challenging because the market is changing.

One trend is that there are more companies seeking liquidity in the second half of 2020, according to Eric Folkemer, head of Nasdaq Private Market.

“With the current Covid-19 pandemic crippling economies, we believe there will be unforeseen changes to the types of companies running liquidity programmes in the second half of the year. Historically, Nasdaq Private Market has served late-stage companies, but early-stage companies comprised most of the liquidity programmes we executed in 2019,” Folkemer says.

Another trend is that more private companies are delaying their secondary transaction plans and, in some cases, re-evaluating their IPO plans as a result of the current market environment, which means private companies are expected to stay private longer.

“More private companies may stay private longer for several reasons, such as the impact of Covid-19 on normal operations, identifying the right talent to take the company to the next level, reporting requirements may still be daunting and expensive, etc. Delaying an IPO allows them to avoid evolving economic pressures in the public market that may reshape their business strategy,” Folkemer says.

Also, more capital is expected to enter the private markets this year despite the current market uncertainty that has negatively impacted the secondary market.

“We believe that the typical buyer in a private market secondary transaction is optimally positioned to deploy capital when private companies’ appetite for liquidity events returns. As the markets return to some level of normalcy, we believe that secondary activity will increase exponentially with buyers ready to put their capital to work since they still hold record levels of dry powder,” Folkemer says.

Even before Covid-19, the concept of private markets as a “defensive” asset class was becoming moot with some asset managers advocating a more aggressive investment strategy for the asset class in view of its strong prospects for growth.

“Investing in what has traditionally been perceived as defensive no longer represents a cautious approach. Investors will need to think differently to generate attractive returns and protect capital. We argue that ‘offense is the new defense’,” says Stephan Schäli, partner, chief investment officer of the Partners Group, a Swiss global private equity manager with US$96 billion in assets under management (AUM).

Schäli argues that since the main driver of returns in private markets at present is growth, Partner Group’s strategy is to seek opportunities to build resilience in its investments instead of buying them by focusing on assets with value creation potential in sub-sectors with above-average growth rates.

“Paying close attention to market dynamics and applying a hands-on approach to governance and value creation are key to growing these assets during our ownership and positioning them to withstand business cycles,” Schäli says.

For private equity, the investment environment remains highly competitive, with valuations near record highs, especially for assets perceived as stable and non-cyclical. Although these factors mitigate downside risk, they only partially justify exceptionally high valuations given these assets' inherent sensitivity to changing fundamentals such as growth assumptions.

“Our strategy in this environment is to leverage secular versus macro trends, focusing on sub-sector trends generating higher top-line growth and identifying opportunities to create value at the asset level which allows the firm to build more resilient valuations and, in turn, should enable its portfolio companies to be more insulated from economic swings,” Schäli says.

Private market AUM grew by 10% in 2019, and US$4 trillion in the past decade, an increase of 170%, while the number of active private equity (PE) firms has more than doubled and the number of US sponsor-backed companies has increased by 60%. Over that same period, global public market AUM has grown by roughly 100%, while the number of US publicly traded companies has stayed roughly flat (but is down nearly 40% since 2000), according to McKinsey Global Private Markets Review 2020.