Private markets hold the key to sustaining corporate growth

Increasingly, the capital to fund corporate growth around the world is coming not from public markets, but from private ones. Private equity firms, venture capitalists, institutional investors, hedge funds, direct lenders and fund managers have all gained attention in recent years – and conditions are ripe for this trend to accelerate further.

The growth of private markets has accelerated since the 2008 financial crisis, outpacing that of public markets, with assets in global private markets now standing at around $10 trillion.^[1] And private credit has been building steadily as an asset class, reaching an estimated $1.25 trillion as of June 30, up from just $400 billion 10 years ago.^[2]

Investors have been drawn to private markets by the prospects of high yields, especially during the extended period of historically low interest rates that lasted until early 2022. Companies – and startups in particular – have also preferred to access funding through private markets because it allows them to avoid the disclosure requirements, investor calls and activist shareholders that come with going public.

Though private market activity has dropped significantly in 2022 on inflation and recession concerns, it has held up far better than the public markets. Given that the global economic outlook is likely to remain weak – and possibly deteriorate further – private markets can become an increasingly crucial source of capital to sustain corporate growth.

Sailing into the wind

Despite the weak macro environment, private capital strategies are expected to double their assets under management from $9.3 trillion in 2021 to $18.3 trillion by the end of 2027, according to data provider Preqin.^[3] To be sure, this marks a slower growth rate compared to recent years, but nonetheless shows noteworthy resilience in the face of surging borrowing costs.

The supply of funding for private markets will come from investors looking for returns that are not correlated to public markets during a protracted period of market weakness and heightened volatility. On the demand side, a variety of companies are strapped for capital in light of tight liquidity conditions.

Preqin highlights the potential of retail investors, who are still under-allocated in the asset class, to drive a new leg of growth for private markets. Global private equity fundraising in the coming years is not expected to match the 2021 high of $561 billion, but assets under management will continue trending up. Private credit will also grow more slowly, though that will be enough to see a near doubling from current levels to an all-time high of $2.3 billion in assets under management by 2027.

Looking for security

Given the pervading economic and geopolitical uncertainty, providers of capital are eschewing unsecured loans in favor of asset-based financing.

EquitiesFirst has a two-decade track record in serving this segment, providing securities-based financing to professional, accredited and otherwise sophisticated long-term investors looking to unlock the value of their equity portfolios without sacrificing the upside potential of their underlying holdings. The flexibility this offers is especially valuable in volatile periods characterized by tight liquidity, when investors may be reluctant to sell their long-term equity investments at deep discounts.

Securities-based financing can also have a positive impact on stock prices. Our analysis of relevant disclosures in Hong Kong found that the price of underlying shares rose an average of 9.6% the month after the announcement of equity-collateralized loans.

And there could be good reason for this. The EquitiesFirst model arguably creates a better alignment between the interests of the funds provider and the investor than other forms of financing. By structuring our financings as agreements to sell-and-repurchase the underlying securities, we essentially function as a funds provider as well as a shareholder. We do not short-sell or lend those shares to third parties, effectively taking long positions in them.

The headwinds currently buffeting the global economy have created an ideal environment to demonstrate the value proposition of securities-based financing. Though it remains a niche component of the broader private capital market, this product is primed to take a bigger piece of the pie by proving its mettle at a time when other funding options are in short supply.

[1] https://www.economist.com/special-report/2022/02/23/private-markets-have-grown-exponentially

[2] https://www.pionline.com/alternatives/private-credit-investors-turn-asset-backed-loans

[3] https://www.preqin.com/future-of-alternatives-2027

Disclaimer

Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.

This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst. EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.

This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document. The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.

EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.

EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:

The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.

The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.

The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.

Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1681/2023) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407). This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.

Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. It is not intended for, and should not be used by, persons who do not meet those criteria.

United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”). In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.