Put simply, where growth once happened after initial public offering, it now happens beforehand.
Private markets have grown rapidly over the past decade. Private market assets under management have grown five-fold since 2010, reaching over $13 trillion globally (see Exhibit 25). This expansion of private capital, which is more opaque than public market capital, has prompted concern that problems may be lingering in the shadows of the financial system.
Rapid growth in a financial asset class should attract scrutiny. But interpreting these developments purely through the lens of ‘excess’ misses a key part of the private market story, which is that over the past two decades, the nature of corporate financing has changed profoundly.
Where companies once depended on public markets for capital to grow, they can now access vast pools of private money through venture capital and private equity. As a result, a larger part of the pathway to maturity for businesses has shifted from the public to the private domain (see Exhibit 26). What looks like exuberance is, in many respects, the reflection of a new normal in corporate finance.
The rise of private markets
To understand the rise of private markets, it helps to remember how companies used to grow. Two decades ago, a business would typically raise early-stage funds from private investors, go public relatively quickly, and then continue to scale through the public markets. Amazon, Apple and Google – three of the Magnificent Seven – all listed within five years of being founded, creating trillions of dollars in value for public market investors over the decades that followed.
Today, that growth sequence has migrated to the private markets. Companies now stay private for longer and reach far larger scale before listing – if they list at all. In the late 1990s, the median age of a company at its initial public offering (IPO) in the US was around five and a half years. In 2024, that had risen to 14 years. In 1996, there were over 8,000 publicly listed companies in the US; today, there are fewer than 6,000. Over the last decade alone, the number of private ‘unicorns’ – venture capital-backed start-ups valued at over $1 billion – has increased eight-fold.
This trend towards listing publicly much later has been made possible by the growth of capital available in private markets. The venture capital and growth equity markets have grown as technology, healthcare and consumer innovations have created new investable opportunities. ‘Buyout’ funds have expanded, to allow companies in venture capital or growth equity portfolios to be sold multiple times while remaining private. Together, these areas of the private markets now provide the financing that small- and mid-cap public markets once supplied. Put simply, where growth once happened after a firm’s IPO, it now happens beforehand.
Why companies choose to stay private
The shift to private markets is not primarily about companies being unable to go public. It is more about firms choosing not to. Listing on a public exchange can offer liquidity and visibility, but it also brings a higher regulatory burden, greater scrutiny via quarterly reports, and the share price volatility that comes with public markets. For fast-growing companies, staying private can provide more flexibility and allow longer-term decision making without the pressure of the quarterly reporting cycle.
Meanwhile, institutional investors – pension funds, insurers, endowments and sovereign wealth funds – have actively sought out private assets to enhance their returns. That influx of capital has created a self-reinforcing ecosystem. More capital leads to larger private market deals; larger deals enable companies to remain private for longer; and the resulting private market expansion attracts yet more capital. It is this structural migration of capital that explains much of the growth in private markets.
Where the growth really happens: Small and mid-market activity
A common misconception is that private equity is primarily about very large buyouts – the kind of multi-billion-dollar transactions that make headlines. The reality is very different, with most of the deal activity taking place in the small and mid-market areas, where enterprise values (a company’s market cap plus its outstanding debt) are typically below $500 million (see Exhibit 27).
In this part of the private equity market, creating value is less about financial engineering and more about improving company operations. Firms benefit from access to well-established and experienced private equity managers that help improve and expand their product offerings, reduce costs, and reach greater scale by entering new geographies.
Private credit: The other half of the story
The expansion of private credit4 is due to many of the same forces that have reshaped private equity. Greater regulation after the global financial crisis led banks to retrench from lending markets. This opened the door for non-bank lenders to fill the gap in corporate financing, particularly in the small and mid-market where banks once dominated. Over time, such direct lenders have become an essential source of capital across company’s lifecycles.
Much of the capital raised in private credit markets today is lent to private equity-backed companies, effectively providing the private debt counterpart to private equity capital. Private credit allows companies to refinance loans, change the mix of their financing, and expand without turning to public markets. For investors, private credit offers an attractive yield pickup over public credit in exchange for providing patient, long-term capital.
Private credit serves two different purposes within private markets. First, it provides growth financing – loans to companies looking to expand, invest or refinance. Second, private credit can help finance buyouts – that is, it can supply loans to finance private equity groups acquiring a company. Today, around 90% of US mid-market buyouts are financed by private credit, up from around 50% in 2017. It’s this latter trend – the financing of private equity buyouts through private credit – that has drawn recent scrutiny.
Where the risks lie
Our view is that the growth of both private equity and private credit has occurred thanks to structural changes in the nature of corporate financing. This is not to suggest that private markets are without risk. Private equity valuations are high, competition for deals remains intense, and the growing links between private equity and private credit mean that stress in one corner of the market may spread into another. However, in our view these remain risks to monitor, rather than evidence of excess.
Starting with valuations, global buyout multiples (EV/EBITDA)5 for mid-market companies are below their 2021 peak but still above long-term averages (see Exhibit 28), at around 13x. That implies less room for multiple expansion to drive private equity returns, making returns more dependent on rising earnings growth and operational improvements. Yet relative to public markets, private market valuations are not out of line: the median EV/EBITDA multiple for the S&P 500 last year was approximately 14x. In other words, private equity valuations are high, but nonetheless in line with public market comparators.
The rise of private equity ‘continuation vehicles’ has also been cited as a cause for concern about private markets, given their rising share of global private equity exits (see Exhibit 29). A continuation vehicle is a new fund set up by a private equity manager to hold on to one or more portfolio companies beyond the life of the original fund. Sceptics argue that the increasing use of continuation vehicles reflects managers trying to hide problems with portfolio companies, problems preventing those companies being sold on at the private equity manager’s desired valuation.
Again, we think this scepticism about continuation vehicles misses the point. While continuation vehicles do allow private equity managers to hold assets for longer, to avoid selling in a depressed market, they do not simply represent managers ‘selling assets to themselves’. In almost all cases, a continuation vehicle transaction requires an independent secondary buyer to validate the valuation and commit new capital. These secondary buyers are typically sophisticated institutional investors or dedicated secondary funds, who will conduct full due diligence on a portfolio company before agreeing to get involved.
Most recent secondary (continuation) deals have been priced at small, single-digit discounts to the company’s net asset value, well within typical valuation ranges. During a period when IPO and merger and acquisition activity in public markets has been slow, continuation vehicles have offered liquidity and price discovery in the private markets, giving private investors options. Again, we think the rise of private equity continuation vehicles simply represents another example of how the system of corporate financing is developing.
The growing interconnectedness of private equity and private credit is another area of debate. It is true that private equity and private credit are increasingly intertwined, with private credit often financing private equity buyouts, or supporting private equity portfolio companies with refinancing.
However, private credit investors are receiving a good fee for these services. There are high starting yields on offer in private credit markets, often in the low double digits for senior (highest priority for repayment) direct lending. This provides a meaningful buffer against potential losses. Even if default rates were to rise modestly, historically strong recovery rates would help offset much of the downside. It would take a severe and prolonged deterioration in private equity portfolios companies to generate material losses within private credit.
Conclusion
All told, we remain constructive on private equity and private credit.
In private equity, falling US interest rates will make borrowing cheaper, helping boost returns and supporting current valuations. The small and mid-market segments of the private equity market, along with secondaries (continuation vehicles), still offer investors attractive ways to access the artificial intelligence theme at more reasonable valuations, potentially at discounts to net asset value. In Europe, more fragmented financing markets and less strident competition to lend make private markets a compelling source of potential alpha. European private markets’ relatively higher weight to technology than public equity indices is also attractive.
In private credit, declining US interest rates will ease debt servicing costs, helping mitigate some default risk even as this gradually compresses headline yields. As always, investors should diversify across managers and vintages (the year a loan or fund was originated) to help reduce concentration and idiosyncratic risk. Within private credit, combining direct lending with exposure to infrastructure and real estate debt can broaden investors’ sources of return, while allocations to opportunistic or distressed debt funds may prove valuable if a material economic slowdown results in market stress.