Supply struggles and inflationary pressures in the post-pandemic world
The global economy is facing several challenges. In April, Titanbay Investment Associate Hakki Mustafa wrote about the prospects for investing in private markets amid geopolitical uncertainty, supply chain issues and rising inflation. Since then, the macroeconomic and geopolitical situations have intensified. As a result, some issues have come more to the fore and investors are asking new questions about how markets are likely to perform in the coming months. These questions fed much of the debate and discussion at the Owen James Meeting of Minds event in June.
On the day, Adam Harrison, Titanbay’s Chief Commercial Officer, hosted a roundtable discussion with several prominent figures from the wealth management and private banking industries. Below, we recap some key elements of the group’s conversation and examine the themes that participants thought most likely to determine the prospects for private markets.
Pausing for thought?
Early in the discussion, there was a focus on the economic factors at play. Supply chain issues - already a concern in light of increased demand in the post-pandemic world, have intensified as a result of the war in Ukraine. These are fuelling inflation and constraining global gross domestic product growth. The World Bank now expects global growth to slump to 2.9% in 2022. This is significantly lower than the 5.75% expansion recorded in 2021. Weak growth and higher prices may combine to create a bout of stagflation. Typically, cyclical assets struggle to perform well in this kind of environment. Roundtable participants emphasised that while investors must hope for the best in the short term, it is essential to keep a focus on long-term solutions.
What is clear is that demand for private market investments remains elevated. Some members of the group felt that there may be a need to “pause for thought”, when it comes to private equity investing, because the number of “unicorn” companies is not high enough to satisfy high levels of demand from new investors coming to market. Others, however, pointed to businesses emerging from promising sectors such as digital transformation. The Covid-19 pandemic has been instrumental in accelerating technological change on a global scale, creating a boom in the number of global entrepreneurs. Our recent blog piece covers this subject in more detail.
Nevertheless, one member of the group noted that “...there is more capital than there are good companies to invest in…”, highlighting the importance of conducting robust and diligent research before making the decision to invest in private equity.
Addressing the liquidity question
From here, conversation moved to another risk associated with investing in private markets — illiquidity. The consensus around the table was that the need to lock in capital for up to ten years may always present a challenge for retail investors. But for sophisticated investors, the risk is not always clear cut. Trading in listed equities, for example, can cause bouts of short-term volatility. Private equity investors, with longer investment horizons, may be able to avoid these. We touch on this subject in this short article and in Edouard Nouvellon’s long-form report, Allocating for the family office - what role might private equity play?
Volatility was also discussed in the context of investment trust pricing. By then, the discussion had moved on to whether the definition of private markets could be considered too broad. Members of the group pondered whether investment trusts might be able to fulfil a similar role to private market investments, but concluded that high volatility in investment trusts’ trading prices may be off-putting to investors. Once again, the long-term nature of private market investing is pertinent here, short-term volatility is much less evident when an investment has a ten-year lifespan.
Making the most of the information advantage
Finally, the attendees agreed about the importance of good intelligence. For private market investors, high-quality, actionable information is crucial. Private markets are the only part of the financial universe where the information advantage — the ability to access and use important data about a business before anyone else — still exists. Obtaining it is costly and time-consuming, however. Having access to an extensive network of relationships within the industry is essential.
Overall, discussion at the roundtable was lively, engaged and well-informed. Adam summed it up as follows:
“At the roundtable I wanted to look at the impact of the current macroeconomic environment on private markets. History shows us that times of crisis can ultimately lead to periods of strong performance for private markets, so we shared ideas as a group on how to adjust portfolios for clients and prepare for the future, seizing opportunities, despite these worrying events.
We concluded that, in volatile markets, investors absolutely need to have those diversified portfolios. Long-term planning is incredibly important, too.
To create portfolios of this calibre, investors need access to carefully curated, best-in-class private market funds, without facing an excessive administrative burden.”