“Private markets have been in a super cycle in the past two decades. But given the macroeconomic environment, investors are now operating in a more challenging environment, faced with high inflation and rising interest rates,” he said. 

Nevertheless, he expects more sustained growth in those asset classes that perform well in volatile markets. “For instance, infrastructure, natural resources and private debt will provide some sort of inflation protection,” he continued. Knaack thinks that the continued demand for these asset classes will push private capital to new heights. As the industry innovates, Knaack also expects growing demand from retail investors and private investors, especially amongst high net worth individuals.

There has been a shift from public, listed equity markets and mainstream bonds toward private equity and credit over the past few decades. This has been driven by a mass of forces, such as more onerous reporting standards on listed firms since the Sarbanes-Oxley accouning laws in the US two decades ago, a desire to get away from the relentless focus that stock markets entail, and investor desire for the premium that less liquid investments bring. A decade of ultra-low interest rates has caused this hunger for yield, adding to the shift.

Preqin’s head of research insights Dave Lowery highlighted how the macroeconomic environment has shifted significantly in 2022: “We survey our investor clients twice a year, the most recent one being in November, which showed private equity, venture capital, and real estate investors are quite pessimistic about the valuation outlook amongst those asset classes, seeing them as overvalued.” 

On asset class performance in 2023, he said that private equity, venture capital and real estate investors are pessimistic and expect returns to weaken over the next 12 months compared with the last. 

Private equity
The firm’s report on The Future of Alternatives In 2027 shows that the combination of higher interest rates and slower overall economic growth prompted by monetary tightening is likely to impact private equity as an asset class. 

The tailwinds that have helped private equity outperform public equity markets are calming. Fundraising in 2022 was the weakest in the last six years ($562.8 billion raised, vs $563.1 billion in 2016), Lowery said.

Venture capital
Even with the challenging macroeconomic outlook, the report states that venture capital is likely to continue as a core allocation for returns' seeking investors – especially once the valuation adjustment is complete.

2023 should be a good year for capital deployment, Lowery said. Lower valuations will provide the opportunity to buy assets at far lower multiples, resulting in solid performance. 

Private debt
With further interest rate hikes widely expected, the firm expects that private debt will attract more attention from traditional fixed income investors.

Amid the macroeconomic challenges, private debt is well positioned to benefit investors, with the macro environment favoring private debt markets. “Investors are bullish toward private debt, with 37 per cent expecting stronger performance. In 2023, Europe’s share of fundraising is expected to rebound back to trend, with 55 per cent of investors favoring Western Europe,” Lowery said.

Hedge funds
Hedge fund investors are generally positive, and the most bullish for 2023,; more than one third believe that the asset class will perform better over the next 12 months, compared with the last, Lowery continued.

Macro funds should see the largest inflows, given current investor preferences toward this top-level strategy. Differing manager views could lead to a wide dispersion of performance; it could diverge in 2023, given a polarization of views. Thirty-three per cent of managers think that the macro cycle is starting to decline, while 42 per cent feel that the cycle is approaching the bottom. Investors are likely to choose a manager that reflects their own market views. 

“Overall industry outflows should persist in 2023, given the lack of an immediate catalyst for an equity market rebound. Nevertheless, hedge fund AUM growth forecasts are the weakest of any asset class,” Lowery said.

Real estate
While it appears that AuM growth for some asset classes will decelerate significantly, real estate could be relatively well protected, the report states.

Investors are pessimistic on the short-term outlook for real estate, as reflected in its AUM forecasts. While its forecasts are optimistic, it is important to frame them in the context of what’s happening now. And for real estate markets, uncertainty has become pervasive and 2022 has proven far more turbulent than many expected. 

“Investors and managers are looking to market niches to find pockets of value – these are likely to be small in scale and require effort to build into meaningful exposure (for example, shared housing),” Lowery added. 

Infrastructure
Following a stellar fundraising year in 2021, it expects global infrastructure AUM to gain ground on real estate by 2027. Europe will become the center of unlisted infrastructure, with growing risk appetites driving performance in a market-led energy transition, the firm said.

Global infrastructure investment is currently lagging behind where it needs to be.

In conclusion, the report estimates that $23 trillion of investment is required to meet the Sustainable Development Goals by 2030 and stay on the path to net zero by 2050.