The megatrend of private asset investment

Don't miss out on a global megatrend. We discuss an asset class that offers the trifecta of strong returns, low volatility and portfolio diversification.

It wasn't so long ago that Australian investors were faced with a slim choice of options. Cash, bonds and shares formed the bulk of offerings for everyday Australian investors.

Not anymore though. The investment landscape is shifting rapidly, and it is being driven by private capital markets.

Recent decades have seen a marked decline in the number of companies listing on sharemarkets. Between 1980-1989, an average of 204 companies were listing each year. The 1990s saw 409 average annual listings.

The first decade of the new central saw this number fall to 130 new listing each year, falling even further to 117 from 2010 to 2019. Following COVID interruptions, 2022 and 2023 saw just 38 and 54 new listings respectively. So this number has fallen significantly, with far fewer new opportunities in listed stocks coming to market for investors now than in the past.

It's not that there are fewer quality companies to invest in. Rather, companies are choosing to stay private, shying away from the high costs and rigorous reporting requirements of listing on public exchanges.

And as many investors are discovering, private capital markets are now offering more opportunities than listed markets.

What are 'private markets'?

'Private capital markets' is the overarching term to describe the different avenues that allow investors to access privately owned companies. The main subsets of private markets include venture capital, private equity (buying a stake in privately held companies), and private credit (lending to private companies).

There is nothing new about these asset classes. What is extraordinary though, is the pace of growth of private markets in recent years.

Accounting firm EY says around $US24.4 trillion ($36.1 trillion) is invested in private markets today, up from $US9.7 trillion ($14.4 trillion) in 2012. For context, the Australian sharemarket is worth $2.8 trillion.

It makes private asset investment a megatrend that Australian investors cannot afford to ignore.

Why are investors moving to private markets?

The growth of private markets reflects several drivers, most notably the intergenerational transfer of wealth, a global trend towards delisting, and companies opting to stay private for longer.

Attractive returns are also a factor fueling growth.

EY notes that over the past decade, private capital markets have outperformed equities, proving "consistently stronger and less volatile" returns than public markets.

There is another factor at work.

Private markets have historically been the domain of super funds and other institutional investors. But as the market has grown reaching a critical mass, so too have opportunities for retail investors.

Private credit - a stand-out market

Private credit, that is, loans from non-bank financial institutions to corporate borrowers, is a stand-out of private markets, having grown tenfold since the global financial crisis of 2008/09, which saw strict capital limits imposed on banks.

From the perspective of private companies, private credit offers pricing certainty and speed, which has helped fuel the market's growth.

For investors, private credit offers strong returns that are not correlated with sharemarkets plus a chance to bring valuable diversity to a portfolio.

A growth market

Today, the global private credit market is worth around $US2.1 trillion compared to approximately $US1 trillion in 2020. The market is expected to grow further, potentially reaching $US2.8 trillion by 2028.

What's driving this growth? Let's break it down.

The US is the world's largest private credit market.

A sub-set of that private credit market is the US Middle market. It is the backbone of the U.S. economy and comprises over 200,000 companies. It accounts for one-third of total jobs in the US and 40% of the US GDP. If the U.S. middle market were a stand-alone economy, it would be the third largest in the world.

And the US middle market is being rebuilt.

The rebuild of middle America sits as the cornerstone of economic policy for both major political parties and Presidential candidates. This is headlined by the Inflation Reduction Act and the hundreds of billions of dollars in public expenditure pledged in support.

Here in Australia, we have a similar though smaller scale proposition with the Future Made In Australia initiative.

These sorts of schemes will power corporate spending backed by several economic evolutions that La Trobe Financial calls the 4Ds:

• Digitalisation - this will see over $US1 trillion invested across the next decades as companies enhance data storage, processing and transmission capabilities.
• Decarbonisation - the shift to eco-friendly energy systems will necessitate $US150 trillion in investment over the next 30 years.
• Deglobalisation - countries and companies will drive $US1 trillion of investment as they bring critical industries onshore.
• De-banking - arising from the de-risking of our interconnected, global financial system since the GFC, de-banking offers exceptional opportunities for investors to participate in the above-noted themes.

How La Trobe Financial is opening doors for investors

La Trobe Financial has a proven track record for private credit in Australia. We have won Money's Best of the Best Credit Fund - Mortgage Award every year from 2010 to 2024.

In 2023, in response to demand from our 100,000-plus investors*, we launched La Trobe US Private Credit Fund to market. It offers everyday Australian investors a defensive exposure to U.S. mid-market private credit. It delivers a low-volatility premium monthly income stream, quarterly liquidity, with invested capital hedged to minimise exposure to AUD:USD foreign currency fluctuations.

With the stage set for private market investments to provide generational opportunities, it's an opportunity that deserves careful consideration.

*Total investors is calculated by adding all individual and joint investors (which includes some investors with a current zero balance in their account) to reasonable estimates of investors investing via platform, trusts or SMSFs. Any advice is general and does not consider your personal circumstances. Past Performance is not a reliable indicator of future performance. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321 and the La Trobe US Private Credit Fund ARSN 677 174 382. It is important that you consider the relevant Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in the fund. The PDSs and Target Market Determinations are available on our website.

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