A comprehensive report by the International Organisation of Securities Commissions (Iosco) has shed light on the accelerating trends and emerging vulnerabilities in the world of private finance.
Published in September 2023, the report shows that the global private finance market has ballooned at an annualised rate of nearly 18% since 2017, with assets under management having soared to a staggering $12.8trn as of June 2022.
Growth and market share
Iosco’s analysis shows that, starting in 2009, US companies have increasingly turned to private markets rather than public ones for capital-raising. Specialised funds such as private credit and private equity have not only expanded but also captured a greater share of the overall financial market.
Private finance is not limited to developed economies; it has also penetrated into emerging markets. For example, in the Association of Southeast Asian Nations (Asean), private equity and venture capital have become significant vehicles for developmental finance.
The report indicates that the US accounts for more than 54% of global private market AuM, while European and Asian markets represent 20% and 22%, respectively.
Risk and vulnerability assessment
According to the study, the growth of the private finance sector has not been without potential pitfalls. These range from possible investor harm and market integrity threats to potential systemic risks.
The report’s authors contend that, while the innate opacity of private finance could shield investors from the transparency costs inherent in public markets, this lack of clarity could also imperil effective risk assessment.
In light of the rapid return of inflation and the normalisation of interest rates, the report questions how prepared the sector was for these changes. Had interest rates rise or even maintained current levels for an extended period, the availability of cheap debt could have diminished, thereby affecting the sector’s financing activities.
The Iosco research highlights concerns that risks in private finance could spill over into public markets. Market participants have emphasised this, especially in sectors like technology and healthcare where private finance has become a critical component.
Fund managers and challenges
According to recent Pitchbook data cited by Iosco, the net asset value (NAV) increase in private equity was 84% between Q1 2020 and September 2022, compared to an 18.8% return in public markets. The report suggests that achieving or exceeding such returns could pose challenges in adverse economic conditions.
The report also notes that total fundraising for private funds fell by over 10% to $1.4trn in 2022. Private equity fundraising dropped by 13%, private credit fundraising by 8%.
The Iosco report unequivocally states that, while private finance contributed positively to economic growth, it is laden with complexities and risks that necessitate careful regulatory supervision. As the sector has undergone rapid expansion, collaboration between market stakeholders and regulatory authorities has become essential for maintaining a stable, transparent and equitable financial landscape.
The full 49-page report is available here.