Who is investing in private markets?

“When I take a look at last year, the volumes stayed fairly robust. In the U.S., over $250 billion was raised and over 1,500 deals were completed, each of which was north of $50 million, so a lot of capital was deployed in 2022,” said Keith Canton, Global Head of Private Capital Markets at J.P. Morgan.

Looking to 2023, investors are still grappling with real uncertainty. Heightened market volatility compressed public market valuations and the likelihood of a U.S. recession has created an environment where investors are looking for downside protection in private market deals — more so than in previous years.

“We’re seeing investors increasingly look for cushion in their deals, and that cushion is coming in the form of lower valuations or structure,” said Canton.

As well as needing more downside protection, the makeup of the private market investor base has also undergone a shift. Historically, private markets were funded by VCs and PE growth funds. A lot of interest and capital from public market investors, mutual funds and large, tech-focused hedge fund communities followed, but that demand has fallen off significantly as a result of the market sell-off in 2022, particularly in tech.

“Companies that looked expensive a year ago now may look reasonably attractive on a historical basis, so a public market portfolio manager may want to deploy there. While public valuations have come down, private valuations haven’t come down quite as fast on the marks,” said Canton.
However, crossover investor participation has declined meaningfully from historic levels as public market conditions have become more challenging.

“The capital from public market investors has been replaced with greater interest from private equity, sovereign wealth funds and family offices, who have all stepped up to fill the gap. It’s why we still had $250 billion of private equity raised last year, even though we lost the public-style investor,” said Canton.

Overall, interest in earlier-stage companies tends to be dominated by VCs and growth equity funds. As companies mature and move closer to an IPO, sovereign wealth funds and crossovers come into the picture.

“Businesses are increasingly looking at raising hybrid capital that sits anywhere between equity and debt, so you have new players such as convertible funds, hedge funds and credit funds also looking at the product now,” said Nicolas Skaff, Head of EMEA Private Capital Markets at J.P. Morgan.

Regionally, Europe is still much smaller than the U.S., but the market is gaining traction. The European market is currently 30–40% of U.S. volumes, with around $90 billion raised in EMEA last year. This is down from the record post-pandemic boom of 2021, but close to double the volumes and transaction numbers seen in 2020.

Which sectors in private markets are expected to see the most growth in 2023?

Technology companies have been key to the growth of private markets in the last 10 years, but is this set to continue in 2023? Tech stocks are in the spotlight after their decade-long bull run was sharply reversed last year — meaning up-and-coming tech startups are facing a potentially longer transition to IPO.

“I do think we’re going to see more of the traditional tech names come to the private placement market this year — software, fintech and potentially some of the consumer internet names — primarily because they are last in the queue to go to the IPO market and they need capital,” said Canton. “If they want to show the growth and potential profitability they need to be successful IPO candidates, they are going to need capital and they are going to need to get that from the private capital market.”

Outside of tech, other sectors such as energy transition and renewables are gaining a lot of interest from investors. J.P. Morgan oversaw close to a dozen private energy transition and renewables transactions in 2022, and at least another dozen are in the pipeline for 2023.

“A big focus for us has been energy transition. We are seeing a lot of new funds from existing investors, particularly corporate VCs and specialist funds, that are specifically targeting the energy transition, renewables and climate space,” said Skaff. “People understand this is an issue that is not going away — it’s a problem that needs to be solved and it’s going to take a lot of capital to do so. For companies demonstrating a solution in their niche of this corner of the market, there is capital available.”

These companies are not immune to the issues other sectors are facing, with valuations still under pressure, and they are also not yet natural IPO names. As many of these startups are trying to tackle highly complex global problems, they tend to have very large capital needs, so the buyer universe and issuers have been more willing to converge on valuations.

Returning to a more fundamental approach of assessing companies on their scalability, profitability and resilience has also been embraced. Even big-name startups without all three of these elements have become less appealing to investors in an uncertain market environment. “Every company has to get looked through the lens of these factors. Those companies checking all the boxes are likely to have successful capital raises, whether it’s public or private,” said Canton. “We are seeing much more focus on those fundamental questions rather than the fear of missing out or FOMO factor that you saw with a lot of the brand-name companies. People are less likely to say now, ‘I don’t want to miss the next big thing, let me just write a check.’”