Doing Your Due Diligence on Private Markets

Morningstar is increasing its due diligence on private markets amid a significant influx of capital into the sector, as highlighted by CEO Kunal Kapoor on Merryn Talks Money. Kapoor notes that the number of private equity-backed companies now far exceeds publicly listed companies, particularly in Europe, where PE-backed firms are double the number of public companies. The discussion also covered the evolving landscape of funding sources for companies and the expectation of lower returns across both public and private markets.

Analysis

Morningstar is intensifying its due diligence efforts in private markets, a response to a significant influx of capital into this less transparent sector, as highlighted by CEO Kunal Kapoor. A key observation is the proliferation of private equity-backed companies, which now considerably outnumber publicly listed entities, particularly in Europe where PE-backed firms are reportedly double the quantity of public companies. This trend signifies a shift in corporate funding landscapes, where private markets are emerging as increasingly viable alternatives to traditional avenues like bank financing or public offerings, which are no longer presumed to be inherently cheaper. The discussion also underscored a broader market sentiment, suggesting investors should anticipate lower returns from both public and private markets going forward. While the overall sentiment of the discussion is mildly negative and cautious, reflecting concerns about market opacity and moderated return expectations, Morningstar's initiative to enhance insights in this area is a notable development. The market impact score of 0.5 suggests a moderate level of attention to this evolving theme.

Key Decisions for Investors

• Investors should acknowledge the expanding role of private markets and factor in the inherent lack of transparency by seeking out enhanced due diligence resources, such as those Morningstar aims to provide.
• It is prudent to recalibrate return expectations downwards for both public and private market investments, aligning with the outlook shared by Morningstar's CEO.
• Consider the implications of increased private market activity on portfolio allocation, recognizing that a growing number of investment opportunities, especially in regions like Europe, reside outside public exchanges.
• Monitor developments in semi-liquid funds and private asset portfolio allocation strategies as these areas evolve to provide broader access to private market investments.