Private capital, an umbrella term which encompasses private equity, private credit, infrastructure, and debt, refers to investment in assets not available on public markets. Typically, these investments are made through funds by institutional investors such as insurance companies, sovereign wealth funds, and pension funds.
Once seen as a small part of the financial system, private capital has grown in importance over the years. Global private market assets under management hit $15.5 trillion at the end of last year – triple just a decade ago. But what is fuelling this growth? A combination of push and pull factors:
Pull Factors:
• Consistently high returns. According to McKinsey & Company, private equity, for instance, has consistently outperformed the S&P 500 since the early 2000s. In another study by CalPERS, the US’s biggest public pension plan, private equity was the highest-performing asset class in the decade to June 2023, with annualised returns of 11.8%. This contrasts with public equities (8.9%) and fixed income (2.4%).
• Long-term view. Private capital’s long-term outlook helps explain its higher returns. Private equity funds span 10–12 years, allowing firms to add value by raising revenues and cutting costs. Public markets, by contrast, are often hindered by short-term pressures: quarterly earnings cycles, activist investors, and heavy disclosure obligations. Increasingly, companies are choosing to stay private for longer to maintain control and focus on long-term growth without the scrutiny of public markets.
Push Factors:
• Era of low interest rates. After 2008, central banks slashed interest rates to near zero. This reduced returns on traditional fixed-income assets like US Treasuries and UK Gilts. Investors turned to private capital for better returns, accepting lower liquidity in exchange for the illiquidity premium. This shift drove large capital inflows into private markets.
• Stricter post-crisis regulation. Following 2008, regulators tightened oversight. In the US, the Dodd-Frank Act increased scrutiny of systemic risk and financial products. Higher capital requirements limited bank lending, especially to riskier companies. This created opportunities for private credit providers to step in. Once valued at $250 million in 2010, private credit is now worth nearly $2 trillion.
To conclude, private capital has grown exponentially. Once niche, it is now a key part of the global financial system. Its rise, fuelled by push and pull factors, has expanded opportunities for both investors and businesses. Whether through private credit or large private equity buyouts, private capital is now a viable, lasting alternative to public markets.
Written by Sameer Chowdhry
Sources: Economist, FT, McKinsey
The Rise of Private Capital
•
