The case for private markets

Global private equity has had a tough few years. After three years of stagnant growth and capital raising difficulties, deal momentum and volume started to pick up in 2025, despite a slowing early that year on the back of tariff announcements in the US.

In 2025 global buyout value rose 44 per cent to $US904 billion while exit value rose 47 per cent to $US717 billion, according to Bain & Company's Global Private Equity Report 2026.

But activity was very concentrated, with deal value dominated by 13 deals of more than $US10 billion each, and many fund managers are still struggling to create liquidity.

A stubborn IPO market and a lack of interest from strategic buyers has made monetisation difficult. As a result, investors have looked to alternative avenues such as the secondary market, where pre-existing investor commitments are bought and sold, and continuation vehicles, which allow a general partner (GP) to return capital to limited partner (LP) investors while still retaining control of an asset.

Given the success of the SpaceX IPO, which has made its initial venture capital and private equity investors millions if not billions, it will be interesting to see if the next mega listings of OpenAI, and Anthropic spark new interest in IPOs as a form of returning capital to investors.

Sector specific

Prior to the acceleration in artificial intelligence, the software as a service industry was a very popular target for private equity. But the growing threat that AI poses to this industry is very real and has prompted increasing talk of a Saaspocolypse.

Oftentimes, private equity investors overindulge and overcommit in the "next big thing", which seems to have been the case with SaaS. But the disintermediation risk that AI poses to software companies may not be the same for all firms. Those that are very rules-based, as opposed to outcome-based, are likely to be more exposed.

Astute GP private equity managers will have realised this and sought out assets and built portfolios that avoid some of this software risk. New opportunities are emerging in industrials and sectors traditionally considered value investments.

One manager, which is also one of the 15 managers in the CI Global Investment Management Private Markets Fund recently launched to the Australian market by GSFM, is American Industrial Partners (AIP) which has a two-decade track record. It invests in industrial businesses carved out of bigger enterprises or otherwise neglected and un-appreciated by the financial markets. It works with those companies to create long-term value. By investing in good businesses having a bad day, it avoids companies overly reliant on the technology of the hour.

AIP are not " finance bros", they are engineers. They like rolling up their sleeves, and figuring out why industrial businesses, be that paint companies, shrimp harvesting businesses or krill harvesting businesses, are not working. They forensically examine the businesses, work out what needs to be remedied with regards to manufacturing or logistics, and then do it.

Private and public

Private equity markets have historically outperformed public markets for a number of reasons. A premium is usually paid for the illiquidity of the asset and there is less volatility, albeit because portfolios are valued quarterly. There are also thousands more companies in the private market space than the public market space.

As private equity becomes more popular across investor classes, and more people invest, the correlation of returns with public markets will compress. Over the past 30 years private markets have generally outperformed public markets. Early on, private equity was a less efficient asset class, which made it easier to generate outsized returns.

This differential might have reduced, but it hasn't disappeared, with the dispersion of returns in private equity likely to continue to be substantial. There may be a shakeout of private equity fund managers as they find it harder to liquidate assets but as the market matures the good operators will remain.

Private credit and venture capital

Private markets also include private credit and venture capital. Much has been written about the potential risks in private credit, but it still has a place in private market portfolios.

Like private equity, private credit offers a direct relationship between the borrower and the lender which can lead to less volatility and a stronger relationship. It also avoids predatory behaviour such as arbitrage between equities (going long) and bonds (going short) issued by the same company.

Of course, just like other private markets, large amounts of private credit extended to the software sector are a concern and have likely led to a deterioration in underwriting practices.  But private credit is more likely to experience dispersion, rather than full blown distress, with more pain in certain sectors like SaaS.

Venture capital is also going through a revolution and maturation. Capital raising by the big AI companies SpaceX, Anthropic, Open AI, have been enormous. Although technically 'venture capital' it is a complete rewrite of what that term means.

The investor case

As more companies choose to stay private for longer, there is a real case for investors looking to the private markets for overall diversification purposes. Given they are usually only valued quarterly, private companies also operate outside of the daily noise of listed markets, allowing managers to focus on improving operations and creating value in the underlying assets.

Similarly, private credit and venture capital also offer opportunities not available in public markets.

Done well with the right strategic asset allocation, a private market allocation for a retail investor should make their overall portfolio more efficient, with higher returns and lower volatility. This is what sophisticated institutional investors have been doing for decades, with allocations of 30 to 50 per cent to private equity.

It is a difficult market to access directly due to the size of the assets, but there are a range of private markets funds that invest across private equity, private credit, infrastructure, real estate and venture capital.

By investing in these kinds of funds, all investors can improve their asset class diversification, reduce risk and potentially increase long-term returns.