Private equity is now at the center of the active investing stage, meaning that the stock market and investors could experience more challenges, especially during a recession. The transition, already underway, will not end anytime soon, said AllianceBernstein. The firm further outlined a future decade during which time ‘main expression of active investing’ will be in private markets. This shift, however, could create potential issues like drying up of liquidity in public markets, in turn giving rise to greater volatility, say analysts. Also, retail investors will have lesser high-growth opportunities due to firms raising money privately and hence opting out of exchanges listing. No alternative assets are within limits unless one is qualified or is an accredited investor.
One of the primary reasons behind the shift is because of relatively lower returns from traditional and conventional investments, such as cash, bonds or stocks. Instead, those with the duty of managing endowment money or pension are opting for alternate investment methods like hedge funds, venture capital or private equity. Reports suggest that stockpile of cash from private equity has reached record heights at nearly $1.1trillion in 2018. Simultaneously, public listed firms are falling with the US public market at a worse condition as compared to the rest of the world.
With money shifting to private equity, major stock indexes would become more subject to huge price swings. Pension funds and endowments will require a meeting of particular liabilities and occasional cash-raising. Nancy Davis of Quadratic Capital suspects higher volatility risk during the upcoming economic downturn and also points out that certain private equity investments have lockup periods, lasting as long as a decade. CBOE volatility index rose this week prior to a Friday trade deadline, although it has stayed mostly low this year. VIX dipped 24% since January. Larry Fink, the CEO of BlackRock, however, warns about excessive and over allocation into alternate investment methods as liquidity dwindles.