Private markets in a new world.

Jun 18, 2020 | Member Blog, News

Nalaka de Silva

Nalaka de Silva, Head of Private Market Solutions, Aberdeen Standard Investments

The world is rapidly changing. Three forces will shape the future: technology, demographics and sustainability. The cost of such a transformation will not be cheap. However, private markets are uniquely placed to help fund and build this new world – creating numerous opportunities for investors.

Technology has transformed our lives. Thanks to mobile devices and the Internet of Things (IoT) we are more connected than ever before. No matter where in the world, we are only one Tweet or call away from friends, family and colleagues. Virtual assistants like Amazon’s Alexa help us manage our homes; even the lowly fridge will order you a pint of soya milk before you run out.

With the advent of 5G, the applications for IoT will be near-limitless. This includes in areas such as medicine. Already we are seeing surgeons using augmented reality to perform simple procedures, like keyhole surgery. Incredibly, they can now perform this operation from anywhere in the world, with 40% more accuracy and 40% less prep-time than conventional methods. In architecture, entire projects can be modelled and run without ever breaking ground, preventing unforeseen problems and costly delays. Augmented reality is also revolutionising warehousing, shipping and more.

This is a growth sector. According to Markit (1), there will be 75 billion connected devices by 2025. Spending on IoT will increase from $567 billion in 2018 to $1.1 trillion in 2025.

A variety of companies will drive this revolution, in software, hardware and physical infrastructure. This is where private markets – be it through equity, debt, infrastructure or real estate – can continue to play a vital role.

Following the 2008 Global Financial Crisis, lending to start-ups and mid-market tech enterprises slumped. Strict regulations and the need to rebuild balance sheets saw major lenders withdraw from this riskier parts of the market. This allowed alternative financers, such as private debt, to fill the gap. So much so, that non-bank debt accounts for 75% of total corporate lending in the US. (2)

With 5G, the investable universe for private markets will expand dramatically. For investors, private debt offers a diverse array of strategies and a number of advantages, particularly in a low return environment.

Live long and prosper

As for demographics, the world’s population is increasing and is set to reach an estimated 8.6 billion in 2030, from 7.8 billion today (3). Most of us are also living longer. The demand for new infrastructure to support our expanding society – from housing and schools, to transportation and energy – will be huge.

Take urbanisation. By current forecasts, 63% of the world’s population will reside in urban areas by 2030. Further, 35% of all people will live in just 750 cities. The most populous of these will be in emerging markets, including Lagos, Jakarta, Mumbai and Chongqing. This will require 540 million feet of new office space, and 260 million middle-income houses. The overall cost for this urbanisation will be in the region of £3.2 trillion-a-year (including new airports, water facilities and telecoms). (4)

Governments alone cannot foot the bill. Indeed, according to the World Economic Forum, the world is facing a $15 trillion infrastructure funding gap by 2040. Private sector financing will be vital to bridge the gap. This includes supply the long-duration capital and management expertise required to build physical structures. It also means investing in the type of tech solutions that will run the cities of the future. These include systems that improve the management of buildings once they are in operation or traffic-flow solutions designed for tomorrow’s driverless car.

A green revolution

The resources required to build this new future – materials, labour, energy – will be immense. At a time when our planet faces great environmental peril, there are concerns this additional burden will drain our already-depleted resources. Elevated pollution levels could make achieving the Paris Climate Agreement targets impossible.

However, the world is at an inflection point for renewable energy. Global renewable energy capacity has doubled since 2008. Thanks to wind and solar power, around 25% of the world’s electricity comes from renewable sources. In Europe, renewables will contribute 34% of the continent’s electricity by 2030 (5). Once again, it is the capital and expertise from the private markets that has helped fund part of this development. Private markets will continue to do so as we journey towards a more sustainable planet.

What does all this mean for investors?

For investors, private markets are an excellent way to potentially make money while helping to build a better future. For those with long-term liabilities, investing in the infrastructure projects of tomorrow could generate the sort of stable, reliable cashflows that are hard to find in traditional bond markets. Private equity has the potential to deliver diverse and uncorrelated returns. Investors have the opportunity to gain a regular income through real estate. And, most importantly, by focusing on the renewable energy sources, we can do all this in a more sustainable and environmentally-friendly way. Welcome to our new world.

(4) Source: United Nations, Department of Economic and Social affairs, Population Division (2018) and Oxford Economics (2019


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