Private Markets

Why do Institutional Investors Invest in Private Markets Funds?


Strategy Types

There are a broad range of strategy types within Private Markets, each with its own unique risk and return characteristics.

Private Markets strategies differ along a number of key factors including the type of return targeted (i.e. capital growth or income), cash flow profile, and typical target returns.

Note that target returns are for illustrative purposes only. Performance is not guaranteed, and will vary significantly by fund. Past performance is not indicative of future returns.

Further information on each strategy type can be found at the dedicated pages below.

  • Private Equity

    Capital Growth

    Private Equity funds seek to generate capital growth for their investors by buying established busin...

    Private Equity funds seek to generate capital growth for their investors by buying established businesses and improving them, before selling to strategic buyers or floating on the stock market.

    Target Returns typically 12-15%*

  • Private Debt

    Yield

    Private Debt funds do what banks used to do before the financial crisis; lending to high quality bus...

    Private Debt funds do what banks used to do before the financial crisis; lending to high quality businesses. Investors look to Private Debt funds to earn more attractive yields than available from liquid bonds.

    Target Returns typically 8-10%*

  • Venture

    Growth Potential

    Venture funds seek to identify the most promising emerging businesses, and provide them with the cap...

    Venture funds seek to identify the most promising emerging businesses, and provide them with the capital they need to realise their potential. Many household names (Uber, Deliveroo etc.) were backed by venture capital funds.

    Target Returns typically 15%+*

*Target returns are not guaranteed

Private Markets Structure

Large institutional investors, such as sovereign wealth funds, corporate and state pension funds, and insurance companies, have been investing in private markets funds for decades. Most institutional investors do not have the expertise to buy or lend to private companies themselves, so instead have invested through fund managers. Today, there are almost 8,000 active private markets fund managers globally, some with funds in excess of $10 billion in size (source: Bain Global Private Equity Report 2018). Historically, these fund managers have only accepted investments from investors who can invest a minimum of $10 million per fund. Consequently, smaller investors have been prevented from investing alongside many of the world's most sophisticated investors.

How Private Funds Work

Funds that invest in traditional asset classes, such as stocks and bonds, are generally open-ended - that is they have no fixed life, and investors can invest and redeem at given intervals. This is made possible by the liquidity of the underlying investments which allows a fund manager to easily invest new capital, or sell positions to generate cash to fund redemptions. Private Market funds are different and have a life-cycle that see investors invest at the inception of the fund, before receiving proceeds later in the fund’s life. This is a consequence of the illiquidity of the target investments – i.e. they cannot be easily bought and sold on a public market.

  • Fundraising

    • This is the period in which a fund manager markets its strategy to potential institutional investors. During this phase, which will often last up to 12 months, potential investors undertake detailed due diligence on the manager and will negotiate the key legal terms of the proposed fund with the manager. Investors who decide to proceed make a commitment to invest in the fund, normally at least $10 million per fund. Once a fund manager has a group of large investors prepared to make a commitment, it will hold a “first close” – the name given to the legal process of bringing these first investors into the fund structure. The first close may be followed by additional closes, before a “final close” is held – this is last opportunity investors have to invest in the fund.

  • Investment Period

    • Once the fund has held its first close, it is able to start investing the money that has been committed by its investors. The fund manager will have developed a pipeline of potential deals during its fundraising process, and will seek to make these, and other investments, during its investment period. It is during this part of the fund’s life, usually 3-5 years, that the fund manager will call the capital from its investors – up to a maximum of the amount originally committed.

  • Return of Capital

    • Once the fund manager has made each investment, it will seek to maximise the return for its investors. In the case of a Private Equity or Venture Capital investment, part of this process will be positioning the company for sale – providing the “exit” for the fund manager. Whenever the fund sells a business, it will return the proceeds to its investors as a distribution. For Private Debt funds, which have lent capital to companies, these distributions will be made upon repayment of the underlying loans when they reach maturity.

In reality, fund managers always seek to have a pool of capital available for investment (known as “dry powder”). Consequently, as soon as the investment period for one fund ends, the manager will seek to hold the first close on its next fund. This is why the track records of private markets fund managers consist of a series of numbered funds, each following the same strategy but with consecutive investment periods.