Growing companies looking to raise money in private markets are enjoying prime conditions, according to speakers at the ELITE Day conference. ELITE is London Stock Exchange Group’s business support and capital raising initiative for private companies.

Speaking at the event in London in October, Rupert Harrison, head of research for diversified strategies at BlackRock’s Multi-Asset Strategies unit, said continued growth in demand from investors for alternative asset classes meant it was a “seller’s market” for any business looking to raise capital from asset owners.

“When we construct portfolios, for example for family offices, we can end up with allocations to private assets of more than 35%,” Harrison said. “That is a huge driver of capital looking for diversification outside public markets.”

Harrison contended that many institutional investors could take much more illiquidity risk than they are currently. He said: “When we think about optimum allocations for long-term investors, we find that our clients tend to be far too worried about illiquidity risks. 

“We have modelled portfolios going back through the global financial crisis, and found that our clients could have held a much larger allocation to alternative assets and not been in the position of being forced sellers at any point, which is obviously the key risk in that environment.”

 There were concerns about valuations in some areas of private markets, Harrison acknowledged. However, he highlighted the direct lending market as an example of an asset class that still appeared relatively more attractive than its public market equivalent.

 “If you compare spreads in direct lending to BB-rated or B-rated spreads, they are relatively attractive,” he said. “In many of these markets it’s a seller’s market. There is a huge amount of capital trying to find allocations to alternative assets.”

During a subsequent panel discussion on alternative assets, Andre Wierzbicki, Chief Operating Officer, Aberdeen Standard Investments Private Markets Development – a joint venture between the FTSE 100 asset manager and Italian group 21 Invest – highlighted that the baby boomer generation could also prove to be a driver for investment in private assets.

“The average age is 62 for an ultra-high net worth client,” he said. “There is something like $2trn which is going to go through the largest financial generational change in history in the next 20 years.”

Lubna Qunash, director in corporate private equity at The Carlyle Group, explained the knock-on effect on public markets.

“On the demand side, we see public markets declining,” she said. “IPOs are retreating, and there are more sponsor-to-sponsor deals in private equity.”

In 2018, the number of IPOs globally fell by 21% year-on-year, according to EY’s quarterly IPO monitor report for the fourth quarter of 2018. In the first three quarters of 2019, there were 768 IPOs globally, EY reported, down 26% on the same period in 2018.

According to data from the Pension Protection Fund, UK private sector pension funds allocated 12% of their equity portfolios to unlisted securities at the end of December – equivalent to just over 3.2% of total portfolios. This marked an increase from 3% at the end of 2017.

Find the right partner

Massimiliano Lagreca, Head of ELITE Capital Services and General Manager ELITE Club Deal Ltd, urged the audience of entrepreneurs and SME leaders not to just focus on the money when raising capital in the private markets.

“There is always a trade-off,” he said. “We always suggest that companies shouldn’t just consider the money available but to also look for investors that will support their development in the long term. In ELITE we give companies the opportunity to raise capital by leveraging on digital processes and new technologies, offering the opportunity to be visible to an extensive international network of professional investors.”

The Carlyle Group’s Qunash added: “The market has so many options for where you can get capital.

“The most important thing is having the right partner to execute the right strategy. Markets are shifting, technology is changing how we do business, so it is vital to find the right partner under any [capital-raising] construct.”

Wierzbicki said the unlisted sector was beginning to generate “new approaches, new innovations and new strategies across all types of private markets, in particular private equity”.

“That space is becoming far more sophisticated, far more technical, and far more nuanced, with multiple strategies within a singular asset class,” Wierzbicki said. “Within private equity there is co-investments, secondaries, different types of leverage being offered.”

Qunash emphasised that Carlyle was keen to form partnerships with family-run businesses and management teams that “have plans for the longer duration”, such as moving from a domestic focus to international distribution.

“As a global platform we can offer help to these businesses and the fact that we have a longer duration means it takes away the pressure from execution,” she said.

Stuart Johnstone, managing director for corporate and commercial banking for London and the South East at Natwest, agreed, adding that there was “plenty of capital and liquidity” available.

“It is about taking the time to really figure out what is the right solution for you at your stage,” he said. “Set your own risk-reward parameters and find the right partner, somebody who is going to support you through the journey.”