Private Markets: why transparency is becoming the new benchmark
Over the past months, there has been repeated discussion about the (lack of) transparency in private markets. Given the increasing allocations to this asset class, with Private Markets AuM projected to rise from around $13 trillion to more than $20 trillion by 20301, the issue is gaining in importance as the growing share of capital raised privately means opacity now has systemic implications for pricing, risk management and investor protection. Furthermore, many institutional investors intend to increase their allocation further, particularly in infrastructure and private credit. The more capital that flows into private markets, the higher the demands on the asset class become. Investors rightly expect greater transparency and are asking more questions, also in light of recent media coverage about valuation and reporting standards.
Private markets are different by design and will never function like public markets. There is no daily price fixing via stock exchanges, no continuous liquidity and, in most cases, no directly comparable transactions. However, the long-term and often higher potential for returns arises not only from the illiquidity premium. Active management of portfolio companies, flexible financing solutions and capital for transformation projects, such as digital transformation and energy security, also drive value creation.
More investors require more transparency
In private markets, therefore, investors such as insurance companies or pension funds with a long investment horizon need different tools to assess quality, risk and performance. Investors should be able to understand the assumptions underlying a valuation. Robust valuation processes, independent review and transparent documentation are further key aspects of the calls for greater transparency.
According to a global survey by the CFA Society2, this is precisely where there is still room for improvement. For instance, 70 per cent of respondents still identify shortcomings regarding the reporting of valuations and performance and to a second extent of fees. The fact that an increasing number of investors are demanding transparency is a positive development and, in our view, demonstrates the institutionalisation of private markets. Furthermore, transparency should not begin with reporting alone, but much earlier as part of the due diligence process. Those who ensure thorough due diligence, clear valuation processes and consistent, well explained periodic reporting at an early stage lay the foundations for robust risk management throughout the entire investment cycle. However, around 40% of the respondents to the CFA survey have the feeling that there are substantial problems in the industry when it comes to valuation reporting. In our view, transparency will increasingly become a competitive and differentiating factor and key element of trust, as more and more investors want to understand how valuations are carried out and risks are managed. Managers that provide standardised, timely data and clear narratives around value creation often experience deeper LP relationships and better alignment in risk management.
Investment professionals’ top concerns in private markets (in %)
Source: CFA Institute, Private Markets: Governance Issues Rise to the Fore
Broader access increases the need for clarity
This has become even more relevant as private markets become increasingly accessible to wealth management and retail clients. The Boston Consulting Group estimated that the AuM in private markets will grow on average by 12% annually up to 2030. This means that individual investors are allocating a growing share of their portfolios to private markets to the tune of 3 trillion US dollars by 2030.1 Rising demand for private market solutions creates a greater need for investor education, as well as more comprehensive reporting requirements for semi-liquid structures such as ELTIFs and evergreen funds, which offer investors greater liquidity features. As the investor base broadens, managers need to explain more clearly:
- how these products work,
- the profile of the investments made on investors’ behalf,
- what role illiquidity still plays and
- how valuation, redemption and portfolio-management processes are governed.
Transparent communication is particularly important because greater accessibility does not remove the complexity of private markets; rather, it increases the need to ensure that investors understand the opportunities, risks and limitations of the solutions they are considering in light of their own investment objectives and risk appetite.
Progress has been made but gaps remain
The industry as a whole has made progress in recent years, for example in terms of reporting templates, due diligence standards and best practices. Nevertheless, data, key performance indicators and valuation methodologies are not standardised across the board. This often makes it difficult to compare managers, strategies and asset classes. Good reporting does not merely provide raw figures, but explains value drivers, risks, portfolio performance, fees, liquidity and potential conflicts of interest.
The professionalisation of private markets continues to advance, partly driven by regulators, by industry associations and by investors who are pushing for higher standards. This is for instance reflected by the reporting of ESG and climate related metrics for which investors increasingly expect Private Markets managers to report consistent, decision-useful information on emissions, social factors and governance, yet methodologies and data quality remain fragmented. Discussions about greater transparency are therefore part of such positive development. In this context, investors should not only consider a manager’s historical performance, but also investment processes, team stability, governance, risk management, valuation methodology and the quality of reporting. Equally important is how investment decisions are monitored and scrutinised.
Transparency is key for growth
Day-to-day transparency does not exist in private markets, but this doesn´t need to conflict with the long-term nature of this asset class. As regulators and index providers explore more accessible products and greater retail access, clear and comparable transparency on valuations, liquidity and fees becomes a prerequisite rather than an optional extra. Furthermore, the availability of more data and information helps institutional investors to assess risks, track performance and allocate capital effectively over the long term. Private markets managers who invest in better reporting standards and disclosures are likely to benefit from greater investor trust and access to capital.
Investor expectations are rising, and the industry must respond accordingly. Ultimately, stronger disclosures and higher reporting standards are not only essential to building trust, but they are also critical to raising quality standards across private markets as they continue to broaden and mature.
