As private credit and private equity undergo a ‘shakeout’ after years of rapid growth, the asset management firms have argued the reset is creating opportunities for selective investors as scrutiny of the sector intensifies.
At a media briefing this week, CI Global Asset Management (CI GAM) senior vice president and lead – private markets Geof Marshall said private credit and private equity are undergoing a “shakeout” after significant development in recent years.
It comes after several high-profile private credit funds faced elevated redemptions earlier this year, partly driven by concerns over exposure to software companies seen as vulnerable to AI disruption.
With software companies also long favoured by private equity investors, these funds have similarly been under increased scrutiny for their exposure to the sector.
At the same time, Marshall noted that private equity has been caught up in a period of “past excesses” following years of low interest rates that encouraged higher leverage in portfolio companies. This was exposed when rates rose in 2022 and floating-rate debt came into play, alongside the expansion of private credit and instances of weaker underwriting practices.
Following the flood of capital into private capital in recent years, these practices have driven demand for greater transparency and regulation.
But despite the noise, Marshall argued the current private markets environment should be seen as creating opportunities for selective investing.
“Change is good, and if you’re coming into this with open eyes and you’re resourced and you have fresh capital, then you actually stand the benefit,” he told attendees.
His comments come after CI GAM and GSFM launched two global private markets funds to the Australian market earlier this month.
The CI Global Private Markets Growth Fund and CI Global Private Markets Income Fund invest in multi-manager, open-architecture funds-of-funds seeded and managed by CI GAM, an affiliate of GSFM. Both funds are available to institutional, wholesale and family office investors, with a minimum investment of $50,000.
As fund-of-funds, each invests in diversified fund portfolios across private markets, spanning private credit, private equity, private real estate and others.
Asked directly about the timing of the fund launches amid broader conditions in private assets, GSFM head of retail business, Ben Williams, said he has no concerns, particularly around liquidity as wholesale investors enter the market.
“Quite the contrary. These vehicles aren’t set up to get your money out in any given quarter…These vehicles, they’re probably more like seven to 10 years. Some of them will close then, but obviously the evergreen element gives you a bit of flexibility,” Williams said.
“We’re challenging advice at the moment to say, whatever your beliefs are, is this a way to diversify your portfolio for the long run? And if you think you justify a premium, then it’s worth exploring. If you don’t, keep doing what you’re doing. There are other ways to diversify a portfolio.”
Like Marshall, he said that being a net buyer in this environment, the increased change and scrutiny across private markets is a positive development.
“The dispersion of returns in private credit or private equity is still gigantic – it may even grow. [This means that] you are able to, in a traditional sense, play the active management game and pick managers affecting that space who have tended to remain higher performers,” he said.
With this in mind, Williams argued that even if private market returns are less strong than they were five to seven years ago, skilled active managers can still generate enough alpha to justify fees.
“You’re paying heavy fees in the private markets, whether you like it or not, because you’re sending people in to reorganise these businesses, but your net returns are still hopefully in excess.”
Marshall added that private markets arguably offer lower volatility than equities, with public markets now increasingly driven by major announcements from companies such as Nvidia that can set the tone for broader market direction.
“Private markets are still founded in signaling in fundamentals, so even if private market returns are lower over the next 10 to 15 years…I think they will be significantly less volatile because you are trading on earnings, as opposed to emotion and noise,” he said.
The pair concluded that while some private markets vehicles have delivered returns driven more by leverage than strong underwriting over recent years, managers that maintain disciplined underwriting and focus on “making boring companies better” still have opportunities ahead.
Leave a comment