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THE NEW DYNAMICS
OF PRIVATE MARKETSInvestment Risks and Opportunities

FALL/WINTER 2022
For professional investors only.
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PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 1

2 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIMINTRODUCTION
Private markets have provided farmers, entrepreneurs,
corporate tycoons and property developers with accessto capital for centuries. The first recorded private loan
was almost four thousand years ago in Mesopotamia.
But the modern era of private equity – focused on
corporate funding – did not start until the emergenceof non-family funded venture capitalists in the late
1940s.1 Nevertheless, the current scale, growth andcomplexity of private capital is unprecedented – and it
is radically altering the investment opportunities andchallenges facing institutional investors.
The size and influence of private capital on the global
economy today is staggering. Worldwide pools ofprivate capital – including equity, credit and real assets– stand at over $12 trillion, double the size from just
six years ago (Exhibit 1). In the US, private markets
accounted for over 35% of new capital raised throughbonds and equity in 2021 – compared to 20% in
2009.2 Even as employers, private equity firms havegrown to be among the world’s largest. The portfolio
companies of Blackstone alone employ roughly
800,000 people, making it the fourth-largest USbased employer.3
Why should investors care about these shifting
dynamics? Quite simply, traditional models ofcompanies raising capital through bank officers andstock exchanges have been disrupted. The resulting
growth and transformation in private capital markets
is opening new investment opportunities – as well as
new sources of risk – for institutional investors. On
the one hand, many private equity and credit markets
are sufficiently scaled to allow investors to increase
allocations, diversify portfolios and access potentiallyhigher returns. On the other hand, investors need to

Exhibit 1: Private market funds have doubled in the last six years
Total net asset value and dry powder, US$ Trillion$12.9
Real Assets$9.2

Credit
VC

$6.3
$4.8

Growth

$3.8
$2.7

2006

Buyout

2009

2012

2015

2018

2021

Source: Pitchbook
Note: Real Assets include both real estate and infrastructure.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 1

The current scale, growthand complexity of private
capital is unprecedented.
consider the illiquidity, embedded leverage, higher fees
and limited transparency as well as potentially frothy
valuations in some corners of private markets.To fully
understand the new dynamics of private markets
and the resulting investment implications, we havedrawn on the insights of more than 40 investment
professionals across PGIM’s private alternatives, fixedincome, and equity managers – as well as over a dozen

2 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

leading private equity and credit managers, venture
capitalists, economists and sell-side researchers.
We share our findings and summarize the key
investment implications in the rest of this report.
Chapter 1 examines the broad macro forcestransforming private markets and considers theimplications for systemic risk. Chapters 2 and 3 coverprivate credit and private equity markets, respectively– focusing on the evolving investment opportunities
and changing set of risks. We include real assets – both
debt and equity – in our analysis. Finally, Chapter 4
highlights the key portfolio-wide implications that
follow from these continuing changes across private
capital markets.

TABLE OF CONTENTSA SHIFTING PARADIGM
FOR PRIVATE MARKETSPRIVATE CREDITEXPANDS ITS REACHPRIVATE EQUITYENTERS A NEW PHASE

PORTFOLIOIMPLICATIONSPage 5

Page 13

Page 23

Page 33

01 02 03 04
PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 3

About PGIM
PGIM, the investment management business of Prudential Financial, Inc. (PFI). PFI has a history that
dates back over 145 years and through more than 30 market cycles.* Built on a foundation of strength,
stability and disciplined risk management, PGIM's more than 1,300 investment professionals are locatedin key financial centers around the world. Our firm is comprised of autonomous asset managementbusinesses, each specializing in a particular asset class with a focused investment approach. This gives ourclients diversified solutions from a leading global institutional asset manager** with global depth and scale
across public and private asset classes, including fixed income, equities, real estate, private credit andother alternatives.

* 30 market cycles represent PFI’s asset management expertise through PGIM and its affiliates and its predecessors.
** PGIM is the investment management business of Prudential Financial, Inc. (PFI). PFI is the 11th largest investment manager (out of 431 firms surveyed) in terms of worldwide institutional
assets under management based on Pensions & Investments’ Top Money Managers list published June 2022. This ranking represents institutional client assets under management by PFI
as of December 31, 2021. No compensation was provided for the participation to this ranking.

4 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIMCHAPTER 1

A SHIFTING PARADIGM FOR
PRIVATE MARKETS“The forces reshaping private
markets are also shifting the
ground beneath investors’ feet.”

EXPLORE CHAPTERS

1

2

3

4
PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 5

CHAPTER 1

A SHIFTING PARADIGM FOR PRIVATE MARKETSBoth the supply of and demand for private capital has increased dramatically since the global financial crisis –and neither the pandemic nor the subsequent inflationary shocks appear to have significantly dampened thatmomentum. We examined this trend and identified four key factors driving the transformation of private capital
markets today.

1. Banks and finance companies
receding from riskier segmentsof lending
Commercial banks used to be the primary source ofdebt financing for firms of all sizes. Over the last 20
years, however, regulatory changes and shifts in businessmodels have led banks to withdraw from certain partsof the market.4 In particular, higher capital charges fromBasel III and other regulations have made commercial
banks around the world less active in riskier segments ofthe corporate and real estate lending market.*, 5

Importantly, the pace of regulatory implementation
impacts the market dynamics in each region. For
example, in the US, where business models have beenchanging for years due to Basel and other regulatory
pressures, the withdrawal of banks from certain market
segments is already apparent. Banks today provide only
about 30% of corporate loans, down from 70% in
1982 (Exhibit 2).
Commercial banks in Europe are only now beginningto implement the latest Basel regulations and standards
that will pressure their capital. This will cause banks in
the region to narrow their focus to more conservative
corporate and real estate lending and ensures a greater

Exhibit 2: Banks are receding from corporate lending
Bank share of corporate loans in the US
70%

60%
50%

40%
30%

20%
1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

2020

Source: Federal Reserve* Basel III is an internationally agreed-upon set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The Basel III standards
are minimum liquidity and capital requirements for all internationally active banks.

6 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Exhibit 3: Finance companies disappeared from the ABS market post-2008
Loans to nonfinancial businesses securitized by finance companies, US$ Billion
$120
$100
$80
$60
$40
$20
$0
1990

1994

1998

2002

2006

2010

2014

2018

Source: Federal Reserverole for nonbank lenders going forward. Additionally,
new rules around open banking will force banks toshare borrower data they currently own with fintech
companies, reducing one of the barriers to entry for awhole array of private nonbank lenders.6

Since 2001, US pensions havedoubled their allocation toalternative assets to over 20%.
In addition to the withdrawal of commercial banks,
lending from finance companies (such as CIT and GE
Capital) has dropped sharply. Their activity peakedin the years leading up to the Global Financial Crisis(GFC) and has declined since (Exhibit 3). GE Capital,
for example, had almost $700 billion in assets in 2008
– equal in size to the fifth-largest bank in the US then.7
After 2008, this form of commercial lending has been
almost entirely wound down or sold off.8 Many of thesefirms raised funds in commercial paper markets, issuedloans collateralized by leases on commercial equipment
or other kinds of receivables and issued asset-backed
securities (ABS). The implosion of securitization
markets triggered by the contagion from subprime
mortgages cratered their commercial lending model.

2. Investors seeking income and yield
increase allocations to privates
Global institutional investors have significantly
increased their exposure to private markets. US
pensions, for example, have doubled their allocation
to alternative assets – including private markets – fromless than 10% in 2001 to over 20% in 2021.9 Looking
ahead, over 40% of global investors say they expect
to further increase allocations to private markets.10
This demand for private assets has been driven by a
combination of factors.
First, with ultra-low global interest rates andtremendous compression in corporate bond spreads
post-GFC, many investors sought higher-yielding
alternatives to corporate fixed-income portfolios– turning to core real estate and mezzanine
infrastructure, for example, for their ability to generatestrong income and stable cash flows.
Similarly, while the empirical evidence remains mixed,
many investors believe private markets offer embedded
illiquidity premia – and have increased allocations
accordingly.11, 12, 13 Additionally, private markets
potentially offer other alpha opportunities throughdirect control over credit covenants or operational
practices of portfolio companies.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 7

Second, many investors prefer the lower frequency atwhich private markets are marked or repriced. Publicmarkets price minute-to-minute and can be volatile– especially when risk appetite changes abruptly. In
contrast, private markets do not price as often andare less exposed to the sentiment-based gyrations(and potential overshooting) of public markets. The
less-frequent pricing has the effect of smoothingvaluations for private assets. During periods of market
turbulence, this lagged repricing can reduce the swings
in net asset values and funding ratios.

New vehicles and structuresto accommodate retailinvestors are emerging.
Third, the appeal and increasing scale of private
markets has also raised interest in broadening retail(individual investor) access to private alternatives.
While the typical US pension plan or endowment has
allocated over 20% of their portfolio to private markets,the average individual investor has roughly 5% of
their investable assets allocated to alternatives.14 Major
private equity and credit managers are introducing
new vehicles and structures – from traded businessdevelopment companies (BDCs) in the US to “openend” private credit funds in Europe – to accommodate
fund investments from retail investors. Some private
credit funds open to individual investors are alreadyapproaching $40 billion in size.15 Future growth could
be explosive. Individual investors are estimated to holdabout $1 trillion in alternatives assets today – which
could increase to $4.5 trillion by 2027.16
This development has the potential to “democratize”
investing by allowing retail investors to access private
equity and credit markets that historically have only
been available to institutional investors – especiallyas the investment opportunity set available via public

8 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

markets alone may be shrinking. However, broadening
the spectrum of private alternative investments toindividual investors can pose significant challenges.
For example, many fund regulations require liquidity
levels that may not align with the longer investment
horizons of many private investments. In addition, it iscritical that retail investors are educated and can accessfinancial advice on the illiquidity and complexityof private assets versus the transparency and dailyliquidity of most publicly listed securities and funds.

3. A growing number of businessmodels may be better suited for
private markets
A host of factors has led to the emergence of businessmodels and sectors that may have a comparativeadvantage in remaining private.
Perhaps the most powerful force is the rise ofweightless firms. Fueled by the secular shift frommanufacturing towards services, companies are moving
away from physical capital (factories and machines)
to a capital-light model centered on investments inintangible assets like R&D, software, intellectual
property, data and algorithms. Intangible assets as ashare of market value have more than doubled in the
US since 1985.17 Over 70% of the market value of the
S&P Europe 350 and 85% of the S&P 500 are now
comprised of intangible assets.18
When scaled, profitable winners in intangible-heavy
sectors can ultimately flourish in public markets –like Alibaba, Google and Amazon. However, thejourney can often be better appreciated and funded
via private markets. This is because intangible-heavy
firms typically have a longer path to profitability andare deterred by the drumbeat of quarterly earnings
and the whims of impatient public equity markets.
This is emphasized by GAAP accounting, which treats
R&D investment as an expense, making it especiallypunitive for tech-driven business models. In addition,weightless firms typically need less capital compared toExhibit 4: Private markets push into energy
Private fund investments in conventional energy, US$ Billion
$61

$36

$11
$1
2003

2009

2015

2021

Source: Pitchbook

firms in physical capital-intensive industries and they
rely less on public markets to scale their businesses.

The median age ofcompanies at IPO morethan doubled to 11 years.

The fossil fuel sector is another area where firms are
retreating to or sticking to private markets. Indeed,
while some investors think of private markets asbastions of innovation around green technology,
one analysis of investment in the energy sector by
private equity firms found that since 2010 less than
15% of investment went into renewable power likesolar and wind.19 Public shareholders and climate
activists have been effective in pressuring largecommercial banks, asset managers as well as publicly
listed energy companies to divest substantially fromcarbon-intensive industries.20 Consequently, especiallygiven the likelihood of a long sunset for fossil fuels, a
growing share of the divested assets as well as

the funding needs of small and medium energy
companies (including carbon-intensive sectors) are
now provided by private markets (Exhibit 4).21 Private
equity firms have also been prominent buyers of coalassets globally.22, 23

4. Companies are staying
private longer
Companies that are going public today do so at amuch later stage – over the past decade the medianage of US companies at IPO more than doubled to 11
years. This is driven largely by PE-backed companies,
which remain in private markets across more stagesof their development. Going public via an initialpublic offering used to be required for any company
of a certain size to access the growth capital theyneed. And over the past few years market participantsand economists have worried endlessly about thedwindling number of public companies. What isunderappreciated – besides the fact that the number ofpublic companies has stabilized following the dotcom
bubble – is that the available capital at every stage ofprivate funding has sharply reduced the need to go
public. Venture capital (VC), for example, has not

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 9

Exhibit 5: Unicorns outpaced IPOs in 2021
Annual number of new unicorns and IPOs
400

IPOs

New unicorns

350
300
250
200
150
100
50
0

2000

2003

2006

2009

2012

2015

2018

2021

Source: World Federation of Exchanges and Pitchbook
Note: Newly listed companies on NYSE and Nasdaq, excluding SPACs. Unicorns are defined as private companies valued at over $1 billion.

only grown sixfold since 2013 but the share of latestage investments (series C and subsequent rounds)
has increased from about half to over two-thirds of
all capital invested.24 Getting a private company toa billion-dollar valuation with VC and other private
investment used to be unheard of – as the moniker“unicorn” attests to. Today it has become quite
common. In 2021, the number of unicorns exceeded
the number of US IPOs for the first time (Exhibit 5).

Many firms in the US andEurope find the heightened
requirements for disclosures
expansive and onerous.

For companies, this means less pressure to tap into
public markets until liquidity events or their sheer size
requires much larger pools of capital. This trend isdriven by available capital, and with over $3 trillion in
dry powder across private markets, firms will think lessabout capital and more about strategy when deciding
on sources of funding.25

10 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

In addition, many firms in the US and Europe find theheightened requirements for disclosures and regular
reporting to be expensive and onerous. In response to aseries of global accounting scandals in the early 2000s,
several countries mandated greater disclosures andrequired reporting for public companies. For example,
the Sarbanes-Oxley law in the US escalated auditing
and other requirements for public firms. The expenseof complying with these new standards is not trivial.
The total net additional cost for US companies tocomply is over $20 billion annually, making the costof going public potentially prohibitive for small andmedium corporations.26 Asia stands apart in this regard
as the number of public market companies has grownquite steadily over the last 15 years, in part because
funding alternatives through private capital markets
are limited (Exhibit 6).

How do private capital markets impact
systemic risk?
The expanded reach of private capital markets –especially the increasing scale of private credit activity
outside the regulated banking system following the
GFC – raises important questions on the resulting
impact to macroprudential stability and systemic risk
across the financial system and economy.27

Exhibit 6: Fewer public companies in the US; boom in Asian IPOs
Number of publicly listed companies
US

9,000

Asia

35,0008,000

30,0007,000

25,000

6,000
5,000

20,0004,000

15,0003,000

10,000

2,000
5,000

1,000

2021

2016

2011

2006

2001

2021

2016

2011

2006

2001

1996

1996

0

0

Source: World Federation of Exchanges
Note: Numbers include both domestic and foreign listings.

On the one hand, lending activity outside of theregulated banking system has less regular reportingand fewer capital requirements. This limited visibility
makes it much more difficult to assess where credit
and other risks are accumulating and how sufficient
loss-absorbing capital may be.28 It thereby becomes
harder for governments, regulators and credit market
analysts to understand if increasing leverage inthe financial system (which can be at the level ofacquired companies or embedded in the fund vehicles
themselves) may be unsustainable or create newvulnerabilities. This is especially true given the procyclical risk-taking behavior across the private credit
sector and as global macro conditions deteriorate.29
On the other hand, diversifying credit risk beyond asmall number of “too big to fail” commercial banks
and dispersing it to a broader array of actors potentiallyreduces systemic risk and broadens access to credit forsmaller and more innovative startups. Private credit canalso be a nimbler and more stable source of funding
compared to commercial bank balance sheets. Investors
in these funds, at least historically, have been pension
plans and insurers with long time horizons. Even in theextreme case of economic or financial distress, private
creditors can arguably move more swiftly and decisively
than large commercial or state-owned banks.

Today’s private credit funds
differ in meaningful ways
from the shadow banks ofthe mid-2000s.
For investors it is critical to understand a few things
about systemic risk in private markets. First, today’s
private credit funds differ in meaningful ways fromthe shadow banks of the mid-2000s. The downfall of
shadow banking in the GFC was primarily due to thefragility of their “borrow short, lend long” businessmodel – raising funds in commercial paper markets
and investing in illiquid long-term assets. During
the financial crisis, the shadow banking system cameunder severe strain as many investors became skittish

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 11

and withdrew funds all at once – a classic run on
the fund. Without access to central bank liquidity
lines, these liquidity and maturity mismatchesstrained shadow banks and many parts of the system
collapsed.30 Today’s private credit funds are far lessreliant on short-term financing. They appear to havecommitted sources of capital in closed-end funds tomatch their illiquid assets so a “run on the fund” isless likely to happen.
Second, while today’s private credit funds may manage
some risk better, the underlying credit risk remains
and investors need to distinguish between private
credit lenders. Some have demonstrated their ability tonavigate economic downturns through multiple credit
cycles and have significant experience with workouts,

12 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

impaired assets and recoveries. By comparison,
relatively new entrants to private credit only haveexperience during a bull market and may be more apt
to be swept up in market exuberance.

The secular forces reshaping private markets arealso shifting the ground beneath investors’ feet
– not just in debt and equity markets but acrossthe entire institutional investment portfolio.
We turn first to credit in Chapter 2, exploring
the expanding reach and complexity of private
credit markets and the resulting investment
themes for institutional investors to focus on.

CHAPTER 2PRIVATE CREDITEXPANDS ITS REACH“

Cyclical and structural transformations have
led to a significant deepening and broadeningof private credit in the post-GFC era.”

EXPLORE CHAPTERS

1

2

3

4
PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 13

CHAPTER 2PRIVATE CREDIT EXPANDS ITS REACH
The cyclical and structural transformations described in Chapter 1 have led to a significant deepening andbroadening of private credit in the post-GFC era. Once limited to a few segments of lending – like private
placements or real estate mortgages originated by insurance companies – the private credit market has
expanded its scope dramatically.
Today, it encompasses more segments of corporate
lending, a wider range of real asset debt and a broader
set of asset-backed loans including those backed byintangible assets such as music royalties and litigation
finance (Exhibit 7). Furthermore, private credit
markets are not only increasing in breadth but in scale
as well (Exhibit 8).

changes around the implementation of Basel III
standards have made banks less competitive and lesswilling to lend to middle-market firms or in the riskier
portion of the market.31 For example, banks’ shareof US leveraged loans – often associated with private
equity buyouts – has halved from 30% in 2009 to
16% in 2021 (Exhibit 9).

Looking ahead, we believe three trends will continue
to shape private credit markets for years to come.

The retreat of banks from the broadly syndicatedleveraged loan market has meant growing opportunity
for collateralized loan obligations (CLOs) and private
direct lending platforms to supply loans for PE
buyouts – referred to as sponsored lending. Foundedin the 1980s, sponsored lending was once the domainof the high-yield bond market and used to fund asurge of leveraged buyouts (LBOs).32 Over time,sponsored lending found a home in commercial banks
and the broadly syndicated loan market. With banks

1. Private credit is gaining shareand moving to larger deals in
corporate lending
Over the last 20 years, banks have lost a significant
share of traditional corporate lending. Regulatory

Exhibit 7: An overview of the private credit landscape
PRIVATE CREDIT
Corporate

Asset Backed

Real Estate

Real Assets• Private Placements• Consumer Loans• Investment Grade• Infrastructure• Direct Lending• Sponsored• Non-Sponsored• Equipment Finance• Core +• Energy• Esoteric, e.g. royalties• Value add• Agriculture• Mezzanine• Special Situations/
Distress

Source: PGIM Thematic Research

14 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Exhibit 8: Private corporate credit ramps up
Total net asset value and dry powder, US$ Billion$1,293

$955

$623
$491
$366
$174

2006

2009

2012

2015

2018

2021

Source: Pitchbook

receding from the leveraged loan market, private credit
providers will continue to fill the void. Direct lending
from private credit funds has grown from less than $10
billion in 2006 to over $400 billion in 2021.33
Competition has become quite fierce with the largest
credit funds having ample capital to put to work inthis highly levered, deal-based segment of the market.
As private equity firms go upmarket and buy out larger

companies, both purchase multiples and the size ofdebt facilities to support these deals have increased(Exhibit 10).34
As the depth of the market for sponsored loans
deepens and more capital enters the space, big-ticket
leveraged loans from private equity buyouts havebecome the sweet spot for large private credit funds.
The swelling deal size benefits the large-scale private

Exhibit 9: Banks withdraw from corporate lending
Bank share of US leveraged loan market
70%
60%
50%
40%
30%
20%
10%
0%
1997

2001

2005

2009

2013

2017

2021

Source: Leveraged Commentary & Data

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 15

Exhibit 10: Leveraged buyouts grow larger
Median global LBO deal size, US$ Million
$120
$100
$80
$60
$40
$20
$0
2003

2006

2009

2012

2015

2018

2021

Source: Pitchbook

lenders whose business model is based on economies ofscale and standardized processes to gain efficiency. Thisscaling trend is evident in the number of loans wherea single borrower combines senior and subordinateddebt into a single tranche.35 The volume of such
“unitranche” deals surged to over $20 billion quarterly
in 2021, compared to about $3 billion just five years
earlier.36 Additionally, PE firms often prefer theperceived flexibility, speed and adaptability of lenders
in the private credit market to the relatively morebureaucratic and inflexible leveraged loan market.37

Since the GFC, banks’ shareof US leveraged loans has
fallen from 30% to 16%.

2. Real asset debt growing as an
institutional asset class
Private credit today is commonly associated withdirectly originated senior and subordinated loans tocompanies. However, the retreat of commercial banks
over the past decade has had an equally substantial
impact on other lending – such as real estateand infrastructure.
16 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Real estate
Lending for real estate has long been the domain ofbanks, life insurance companies and some pensions.
Life insurance companies have often provided capitalfor more conservative “core” real estate – that is, toptier properties in prime locations with low vacancies
and quality tenants in place. These kinds of properties
have served as stable sources of income and yield forlife insurers for decades.
For their part, banks have historically been active
both in core real estate as well as in more speculative
segments – like funding land development, building
construction or subordinated debt. The Baselframework that emerged following the GFC has
shifted the dynamics of capital allocation in this space.
Specifically, banks have mostly retained their core realestate lending but, as Basel III standards are rolled out,
have pared back from riskier segments of the real-asset
credit market.
The regulatory impact on real estate lending ismost apparent in markets like the U.K. where
implementation of the Basel framework is furthest
along and nonbank lenders are gaining market
share (Exhibit 11). Commercial banks have also
receded from riskier real estate loans in the UnitedStates. Europe, however, lags the US and U.K. as
implementation has been significantly more gradualwith banks still dominating real estate lending.38

Exhibit 11: U.K. nonbank lenders increase market share
Market share of U.K. nonbank lenders in commercial real estate
10%
8%
6%
4%
2%
0%
2013

2015

2017

2019

2021

Source: Bayes Business School and PGIM Real EstateWith banks vacating the riskier realms of real estate insome regions, new private credit players have stepped
in. The amount of capital deployed by nonbank
infrastructure debt funds has surged globally – morethan doubling in size in eight years (Exhibit 12).

Infrastructure
The scale of institutional investor capital in private
infrastructure funds has taken off over the last decade

as investors look for stable and diversified sourcesof return. The transition to renewable energy willcontinue to drive significant growth in infrastructure
investment opportunities. The International Energy
Agency estimates over $100 trillion of infrastructure
investment will be required to reach net zero by
2050.39 These investments will span renewable power
generation, transmission and storage, as well as thedevelopment and rollout of new technologies that

Exhibit 12: Private markets expanding in real assets
Total net asset value and dry powder, excluding real estate, US$ Billion$1,379Rest of the World
Asia$1,043
Europe$557$330

North America

$74
2005

2009

2013

2017

2021

Source: Pitchbook
Note: Private equity and credit funds investing in oil & gas, metals & mining, timber, agriculture and infrastructure.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 17

eliminate barriers to widespread renewable adoption,such as intermittency (i.e., solar power is not available
on a continuous basis or on demand).
Perhaps surprisingly, there may also be opportunities
in the “greener” end of traditional oil and gas forinvestors with the appetite to play in this space.
Capital in this sector may have increased scarcity value
as exclusionary ESG approaches have caused investors
to step back from funding high-carbon assets despite
the inevitability of a protracted multi-decade sunset
for fossil fuels.40

Deals that used to be structured
by banks and distributed via
public markets are finding their
way to private credit players.

3. Specialized lending is maturing as
an institutional asset class
The GFC marked a period of change for specialized
asset-backed lending. First, the implosion of
securitization markets triggered by the contagion
from subprime mortgages enabled private capital andother nonbank players to take a larger role. Second,
the regulatory changes to banks prompted by thecrisis resulted in tremendous pressure on banks to
de-risk their portfolios and has caused them to narrow
their focus on conventional lending to high-quality
borrowers with high-quality collateral. The collapse ofmany specialty finance stalwarts combined with theretreat of banks from securitization markets has meant
asset-backed lending is increasingly being funded
by institutional investors. Indeed, private credit andpublic fixed income managers with strong structured
product expertise have stepped in to fill the void in
the asset-backed lending space.
The ABS market is broadly divided into threesegments: equipment-based finance, consumer

18 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

lending and other “esoteric” collateral. Increasingly
deals that used to be structured by commercial banks
and distributed via public markets are finding their
way to non-bank structurers and being distributed
through private channels. Furthermore, issuers
themselves are bypassing banks and public markets
altogether and more directly tapping into selectinvestors through private bespoke deals. For example,
many insurance firms face more favorable capitaltreatment on mezzanine CLO tranches than onsimilarly rated corporate bonds or loans.41
Looking ahead, there are early signs that somestrands of esoteric ABS backed by assets as diverse asintellectual property, inventories, account receivables
and enterprise computing is emerging into a sizable
asset class. These ABS will be accessed by investors
not via public markets but increasingly through directaccess to primary originators.
Investors are also tracking the progress of a growing
cadre of fintech firms that are crowding out
traditional bank and credit card lenders.42 The rapidly
evolving world of peer-to-peer lending, point-ofpurchase credit and other kinds of digital-enabledcredit to consumers is providing fertile new groundfor securitization – despite some uncertainty aroundcredit performance in a downturn. Digital-based
lenders like Crowdo and Maneo in Asia, Minto andKlarna in Europe as well as Lending Club in the US
all provide loans or credit to individuals and small
businesses. These loans are originated and arranged
by fintech platforms and are gaining scale throughAI-driven algorithms for underwriting and risk
management. These credit providers often dependon private pools of capital and this kind of consumer
credit is a new realm for securitization.

Investment Risks and Opportunities
1. Investors should evaluate their credit
exposure holistically
The lines between public and private markets are
increasingly blurring – and private credit is no
exception. Attractive private credit opportunities canoften be found at the nexus of similarly rated publicExhibit 13: BDCs are shifting to direct lending
BDC portfolio composition
100%

Broadly Syndicated Loans
80%60%

Direct Lending

40%
20%
0%
2013

2015

2017

2019

2021

Source: Leveraged Commentary & Databonds in traditional credit funds and illiquid, longlock-up drawdown funds.
For example, as US BDCs grow, they are taking amore active approach to lending, now making loans
directly to PE-backed companies (Exhibit 13). The
increasing use of these investment vehicles enables
capital from “public” investors to fund origination of“private” credit.
The massive scale of fundraising for direct lending
platforms is increasingly driving private credit players
upmarket into segments that used to be funded bypublic markets. For example, private credit players are
increasingly bidding on and winning larger corporate
debt deals that would historically have been funded in
the broadly syndicated loan market.43
As a result of this growing intersection between private
and public credit opportunities, investors need toview their debt exposure in its entirety. A credit risk
approach that looks at private credit separately frompublic may no longer be optimal due to the growing
overlap and interplay between the two segments. For
example, portions of the same underlying corporateloan can find a home in syndications, CLOs or evenprivate debt funds.

Similarly, a consumer credit card company can haveits receivables securitized through a bank platform,
rated by a credit agency and distributed broadly in a
public market; or that same credit card receivable canbe packaged into an ABS by a private credit playerand sold to several of their credit funds. No matter the
structure, the growing fungibility of the underlying
credit means there may be less diversification benefit
from allocating separately to public and private debt.

Direct lending from private
credit funds has grown fromless than $10 billion in 2006
to over $400 billion today.
2. Look beyond sponsored lending
With the growth of private equity, sponsor-backed
lending comprises more than 70% of the direct
lending universe.44 However, attractive investment
opportunities in corporate lending may lie beyond thecrowded sponsor-driven segment – though these deals
may be more difficult to source.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 19

There are hundreds of thousands of middle-market
companies in the United States and Europe.45,46
Private equity firms are involved with fewer than
10% of these companies. The non-sponsored lending
segment consists of loans made to the vast remainderof middle-market companies – and this segment is
not nearly as flush with capital. These are mostly
companies owned privately or by founding families
that depend on bank financing and have moreconservative balance sheets.

debt solutions. Investors should seek platforms withexpansive networks to source bespoke deals in the nonsponsored segment as well as underwriting and credit
expertise to execute on these transactions. Additionally,
experienced teams with strong track records throughmultiple credit cycles can deliver more consistentinvestment performance.

While they present a less crowded opportunity set,non-sponsored middle-market companies pose a broad
range of company and credit risks. Some, for example,
can be monoline businesses with a less diversified
stream of products and client base. Importantly, direct
lenders in the non-sponsored segment can be selective
about their borrowers. This makes it especially criticalthat direct lenders in this segment excel at identifying
and mitigating these risks.

While fossil fuels will eventually be replaced by greener
sources of energy, this transition will take decades toplay out. Oil and natural gas will have a long sunset
before wind and solar-based energy sources ramp up
sufficiently to meet global demand.47

Non-sponsored middle-market
companies represent a lesscrowded opportunity set.
Investors in this segment of the market should look
for several key characteristics of firms. First, theyshould look for firms that are leading players in a niche
industry – e.g., a regionally dominant supplier. Firms
with this profile may not provide sufficient growth
opportunities to attract PE investment, but theirreliable and strong cash flows can be very attractive fordirect lenders.
Second, the sweet spot for direct lenders are firmsthat have outgrown their bank relationship either
in size or scope (perhaps the firm is seeking growth
capital that is beyond the risk spectrum of their bank)and prefer not to tap capital markets because of the
public disclosures that would entail. This segmentof the market has a relative scarcity of capital. Direct
lenders with a willingness to build relationships
with owners, understand their business strategy andcarry out bespoke underwriting – with specialized
covenants and custom terms – can create attractive

20 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

3. Energy infrastructure offers unique
opportunities

In the conventional energy sector, private equity firms
are quite focused on the larger middle-market firms.
This segment is flush with capital and firms have little
problem finding financing in the sponsored lending
market. Many smaller energy firms, however, areunable to tap these pools of capital. Coincidentally,
regional and commercial banks are less active in
lending to this midmarket segment and focus theiractivities further upmarket.48 For direct lenders, thissegment of conventional energy in North America
offers intriguing opportunities as capital can be scarceand lenders have some leverage over pricing and terms.
Early stages of oil and gas exploration and drillingare often financed with equity. However, once this
exploratory work has been completed and optimalareas for drilling wells have been verified, energy
players often turn to debt markets for the lower-risk,
capital-intensive next stage.49 This kind of mid-stage
producing well offers proven cash flows and tangible
collateral – making for solid credit fundamentals.
Debt that is conservatively underwritten – low leverage,
simple capital structures and lending only on the valueof known reserves – can be appealing to investors
with ESG philosophies compatible with investingin companies at the greener end of the conventionalenergy industry. Additionally, mezzanine debt cancome with attractive coupons based on the proven cash
flows as well as added upside exposure in the form ofasset royalties or warrants – which can provide reliableinflation protection for investors as well.

4. Newest segments of specialized lending have
yet to be tested
Despite the novelty of the more exotic niches of
specialized lending, their credit scoring models have
yet to be tested. For example, the last 10 years haveseen a surge of fintech lending platforms underwriting
loans that offer unsecured credit to individuals andsmall businesses. Many of these players have a businessmodel of securitizing these loans into ABS and sellingthem to investors. However, the AI-informed models
underpinning these new kinds of credit have yet to
be stressed through a complete credit cycle, whichraises legitimate concerns about the performance of
these ABS.
These new kinds of lending can be everything from“buy now, pay later” models, like Afterpay and Affirm
that have become ubiquitous on online shopping sites,or merchant cash advances from their payment service
provider. Many of these credit platforms leverage
AI-powered algorithms to score credit risk. Becauseof the supportive macro landscape during their brieflifespans, few of these scoring models or businesses havebeen challenged – and even fewer have experienced
economic downturns or actual default cycles.
With global inflation on the rise and economic growthslowing, it stands to reason some lending businesses
and their credit scoring methods will be tested likenever before. This has already translated into higher
funding costs for some ABS issuers and investor
concerns over the viability of the business model.50
Other segments of the market that have relied on
fintech apps powered by data science and algorithms– peer-to-peer lending and merchant advances,for example – will surely be tested during difficult
macroeconomic environments as well.
By contrast, senior tranches of more conventional
structured products – like CLOs and CMBS, forexample – offer more tested credit models andstructures. Today these structured products include
many of the same borrowers as before but are often
funded with private capital and structured outside ofbanks. Senior tranches of US and European CMBS
and CLOs have a strong track record of performancethat spans complete credit cycles. These more tested

structures may be attractive to investors as the macro
environment grows more challenging. Additionally,
these private securitizations can offer a better liquidity
profile than comparable whole loans as well as
favorable capital treatment and risk-adjusted returns.51

With global inflation on therise, new lending business will
be tested like never before.

5. Housing is an enduring global trend forreal estateWith growing economic and market uncertainty inthe near term, some real estate investors will adjusttactics by shortening duration and moving up in
credit quality. From a strategic perspective, however,investors should stay focused on long-term structural
themes in real estate. These themes are more apt toendure through an entire economic cycle. Investors
should consider both debt and equity investments forthese key themes, depending on market circumstancesand pricing.
One such theme is the ongoing trend towards
multifamily rental housing. With the price ofindividual homes surging in major urban areas
globally, homeownership is increasingly beyond thereach of many families. As a result, more households
are turning to multifamily housing to meet their
shelter needs. Furthermore, since the COVID-19
pandemic, more people are looking to live alone,creating a surge in household formation.52 These
broad trends are likely to persist and continue creating
attractive opportunities for real estate investors.
Several characteristics of multifamily rental housing
make it especially appealing to debt investors as
economic growth decelerates and inflation rises. Evenas growth slows, income generated by the residential
sector is underpinned both by the basic need for
shelter and by the robust demand for more affordable

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 21

living spaces in major cities. Additionally, rental
housing offers some inflation protection as it typically
reprices annually.
Investment opportunities are abundant in the US
where the rental market is well established – especiallyin coastal markets like New York, Boston and Los
Angeles – and occupancy and rents are recovering fromtheir pandemic challenges.
The declining affordability of homes for purchaseis prevalent in other parts of the world as well. For
example, individual homes in major Asian cities are
now among the least affordable as home prices haveoutpaced income growth for more than a decade.53
Housing rental expenditure has been growing rapidly
and is expected to continue. Major cities in Australia
such as Melbourne and Sydney are forecast to see theirrental markets double in size over the next decade.54

22 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

In Europe, across the three largest economies – France,
Germany and the U.K. – 6% annual growth in house
prices since 2015 has far outpaced sluggish inflation
rates in the EU. Cities in the U.K. such as London
and Manchester may offer especially attractive debt
opportunities as the demand is robust and rents tend
to be less tightly regulated.

Credit markets are of course only half of theprivate capital story. The next chapter looks at
the new dynamics of private equity markets– leveraged buyouts, venture capital, direct
real estate and infrastructure equity – to help
identify hidden risks and new opportunities forlong-term investors.

CHAPTER 3PRIVATE EQUITYENTERS A NEW PHASE“

Investments in private equity go wellbeyond LBOs and include direct realestate, infrastructure, and secondaries.”

EXPLORE CHAPTERS

1

2

3

4
PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 23

CHAPTER 3PRIVATE EQUITY ENTERS A NEW PHASE
For many, the term private equity is synonymous with spectacular corporate buyout deals. And while LBOs remain
the largest segment, private equity markets have grown exponentially over the past two decades and now include
much more – such as direct real estate, infrastructure equity and secondaries (Exhibits 14 and 15).
There is no question low and stable interest rates,
steady economic growth and rising valuations overthe past 15 years have created an almost ideal macro
backdrop for private equity markets. Deviations
from this optimal environment, as we are observing
currently, will certainly put portfolios and managers to
the test, in many cases for the first time in more thana decade. But regardless of how the next few years playout, several trends will continue to shape the broadprivate equity landscape.

LBO deal size has doubled
in the last 10 years to over$100 million.

1. Private equity leaders separate fromthe pack as dry powder and deal size
hit new highs
With a record $870 billion available to invest, deal
sizes are rising across the PE industry.55 This trend
toward scale is apparent across the private equity
landscape. Venture capital is at the point where
unicorns are no longer mythical but rather mundane.
And in LBOs, deal size has more than doubled from$48 million in 2011 to $101 million in 2021.
Consequently, PE firms have evolved from the pureleveraged buyout shops of the 1990s into diversified
private alternative conglomerates with extensive andsometimes interlinked interests across equity, credit,

Exhibit 14: An overview of the private equity landscape
PRIVATE EQUITY
Corporate• Buyouts• Growth Investment• Venture Capital• Early Stage• Late Stage• Seed/Pre-Seed

Source: PGIM Thematic Research

24 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Real Estate

Secondaries• Real Estate• Core• Core+• Value Add• Opportunistic• Corporate• LP transactions• GP transactions• Infrastructure• Core• Non-Core• Infrastructure• Real EstateExhibit 15: Private equity assets more than in the last decade
Total net asset value and dry powder, including real assets, US$ Trillion$11.5
Infrastructure
Real Estate

$8.2

VC
$5.7

Growth

$4.3

$3.5
$2.5

2006

Buyout

2009

2012

2015

2018

2021

Source: Pitchbook

real estate and infrastructure. The five largest PE firms
grew their total AUM by over 200% to $2.1 trillion
over the last decade – representing almost a quarter ofglobal PE assets under management.
The advantages of established PE incumbents – longtrack records, low key-person risk, established global
relationships and the ability to invest at a needlemoving scale for large investors – have led to a morechallenging environment for new managers. Indeed,
in a recent study, emerging PE managers (those raising
for a first, second or third fund) had lower median
return and higher volatility than more establishedfunds (those raising a fourth or subsequent fund).56
Consequently, investor appetite for emerging managers
has abated, with a meager 11% of investors “morelikely” to back new managers.57

Exhibit 16: Private equity returns are highly dispersed
Performance of top and bottom quartile funds since 2004
Top Quartile

21.3%

Bottom Quartile

11.1%

10.6%
8.4%

8.6%

8.0%

Private Equity

Public Large-cap

Public Small-cap

Source: Pitchbook and eVestment
Note: Internal rate of returns for PE funds of the vintage 2004 to 2017 as of December 2021. Public large-cap and small-cap represent US mutual funds of the same category, respectively.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 25

Exhibit 17: Secondary markets are increasingly GP-ledTotal GP- and LP-led transaction volume, US$ Billion
$134

$88
$58
$40
26
2013

33
7

14

2015

2017

LP-led

62

44

$28

72

62

GP-led

26
2019

2021

Source: Greenhill Cogent, Global Secondary Market Review H1 2022.

Importantly, the performance of PE is in largepart due to a small set of funds that persistently
outperform their peers. The dispersion of returns
within PE highlights the importance of manager
selection – the top quartile of funds generates
investment returns more than twice as high as
the bottom quartile. This degree of dispersion in
performance is much greater than in public equity
markets where manager performance is more tightly
clustered around the median (Exhibit 16). Given thesetrends, the market will continue to see consolidationof a still highly fragmented industry with more than
18,000 private equity funds in the US alone.58

2. Private equity secondary markets
are deepening
As the primary PE market has matured and theshare of PE in institutional investors’ portfolios has
increased, it has created a need for liquidity andstrategic management of PE positions. Secondary
markets provide a solution to LPs’ need for flexibility
by creating a market for stakes in private equity
portfolios, often to a fund that specializes insecondaries. These deals are driven in part by a needfor liquidity under stress – which can be seen in the

26 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

spike of secondary deal volume during the GFC.
However, the secondary market is increasingly being
utilized for portfolio management – apparent in thegrowing share of secondaries from almost 2% in theearly 2000s to over 5% of total AUM in the last
five years.59

Secondary markets canbe an essential tool for
portfolio management.
For LPs, the secondary market has proven to be aneffective tool for managing their growing private
equity portfolios. This can range from a simple
rebalancing of target allocations to a major adjustment
across the portfolio from a change in investment
strategy. Investors also do not know the compositionof firms that VC or PE funds will end up investing in.
Therefore, as funds deploy capital, investors may findthe need to reallocate for a variety of reasons, such as
overexposure to certain sectors or regions.
In times of market uncertainty, secondary transactions
provide the option of liquidity but also the potential
for rebalancing at discounted prices. Secondary deals

usually happen at a discount to their net asset value,
but during market uncertainty the gap between
previous valuation and secondary pricing widens.60 For
both LP and secondary funds this means opportunity
in growing exposure to existing investments for which
discount rates seem excessive or to access sought-afterinvestments at potentially attractive valuations.
Increasingly, sponsors themselves have become asignificant part of the secondary market. In so-called
GP-led transactions, a sponsor restructures a fundby transferring one or several of its existing portfolio
companies into a new fund (either by tender offer,continuation fund or a secondary sale).61 For thesponsors, rather than exiting their investment outright,
these transactions provide additional time, capital – orboth – to maximize value. For example, KKR raisedover $2 billion in a continuation fund to hold onto
Internet Brands after increasing revenue eightfold.62
These new deals provide an attractive tool for sponsors
to manage their portfolio companies and it is therefore
not surprising the share of GP-led transactions has
more than doubled over the past five years to almost
50% of all secondary volume (Exhibit 16).

GP-led secondary transactions
have doubled over the past
five years to almost 50% of all
secondary volume.

3. The largest institutional investors
are transitioning from LPs to GPs
Institutional investors with heavy allocations to
private markets are increasingly looking for ways toreduce their fees. A few investors are finding ways
to do this, while simultaneously getting more direct
exposures to competitive private markets, throughdirect and co-investments. These deals are a departurefrom the traditional PE fund structure, where thegeneral partner would raise capital from a handfulof limited partners, usually institutional investors,
with equal rights and obligations. Today, a handful ofthe largest investors, including CalPERS in the US,
Singapore’s Temasek and Canada’s CPP, have either
co-invested with PE and VC firms or manage direct
investments themselves. These deals are structured
with institutional investors as equal partners – or soleinvestor – giving them the potential for higher net
returns (through lower fees). However, these attractive
terms come at a heavy cost – they require significant
investment of capital, a high conviction in their PE
partner and considerable in-house talent to directly
manage the investment and its accompanying risks.

4. Private equity firms are seeking
more permanent sources of capital
Long-term capital is at the heart of private market
investing. While institutional investors are the main
source of this patient capital, PE firms are increasingly
looking for alternate pools of permanent capital. This
would reduce their reliance on perpetual fundraisingand potentially allow them to invest in assets withlonger payback periods. Several ways of accessing
permanent capital are emerging today.
One is to directly acquire or partner with an insurance
firm. The mergers of Apollo and Athene or KKR andGlobal Atlantic are good examples of this.63, 64 For thePE firms, this provides multiple benefits: (1) capitaldoes not need to be recommitted, and (2) excess
returns are not distributed to policyholders but can
accrue to the sponsor.65 These benefits have led to an
uptick in PE-owned insurers. Almost non-existent a
decade ago, PE-owned firms now manage almost 7%of the overall $7.5 trillion of US insurance assets.66
A second option is to employ permanent investment
vehicles – rather than the classical closed-end funds
that typically have a time horizon of eight to 12 years.
Increasingly these vehicles are also targeted at HNW
and affluent individual investors. VC firm Sequoia
Capital, for example, expected to raise up to $20 billion
in its permanent capital fund launched late in 2021.67
These funds offer a continuous stream of investment
capital to private equity firms while providing limited

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 27

liquidity to investors – withdrawals are typically limited
to 5% per quarter – to address the liquidity mismatch
between the fund’s assets and liabilities.

Continuation funds have thepotential to misalign interestsof GP and LP investors.

portfolio companies. This access to broad segmentsof the market may be especially attractive for smaller
investors who seek diversification but do not have theability to invest with multiple primary funds.

2. Closely monitor PE fund practices
and structures
One of the strengths of classic private equity investingis that GP and LP interests are very well aligned
through much of the process.70 However, the influx of
new investment vehicles and structures provide hidden
risks and potential for incentives to diverge.

Investment Risks and Opportunities

Continuation funds

1. Secondary markets increase flexibility andcreate new opportunities

Continuation funds have the potential to misaligninterests of GP and LP investors.71 Despite the closedend fund structures, GPs have found new ways ofcreating degrees of freedom for themselves aroundthe management and exit of portfolio companies. In
some cases, the timing for an exit is especially bad due
to broad market and economic conditions. In othercases, a GP may value the future growth prospects ofa portfolio company so highly, they want to provide
more capital and hold on for longer.72

As private markets and their complexity grows,
so will the need for portfolio rebalancing, fund
restructuring and liquidity options. The size of thesecondary market is driven by both the exponential
growth of private equity AUM and the fact thatcompanies remain in private markets far longer.
Potential issues around rebalancing can also arise dueto the mismatch in valuation frequency. That is, adecline in overall market valuations will be felt first in
public market assets and may cause asset allocations
to deviate from target allocations. This is also known
as the “denominator effect.” Secondary markets canbe a vital portfolio management tool, especially forinvestors bound by strict allocation targets.68 Buyersthat can provide liquidity in these times can benefit
from the need to sell during market uncertainty.
For secondary funds or other buyers, these secondarytransactions can provide low entry points forinvestment as well as transparency into the identityof portfolio companies and their track record.69 This
may dampen the J-curve effect – the phenomenonof negative returns during the early years of capital
deployment by primary funds. Secondary funds canalso potentially provide exposure to a broader segmentof the private equity market than a single primary fundcould – given the fact that they are exposed to multiple
primary funds and therefore exponentially more

28 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

No matter the circumstance, a GP may want to transfer
one or more portfolio companies from a current fundthey manage to another fund that they will continue
to manage but will be capitalized primarily by private
equity secondary funds. In these situations, theinterests of the GP and LP can diverge. The transfer
of a portfolio company from a GP’s current fund totheir continuation fund is heavily influenced by the
GP. Though getting a fair market valuation is common
practice, this transfer typically happens at a valuationthat is often not an arm’s-length, market-basedtransaction. The GP, in this case, would benefit froma higher valuation that provides more capital as well as
more carry and management fees.
While LPs are typically provided the option tomaintain investment as is, commit to the newfund or liquidate out of the old fund, they need toassess the risks and benefits in the context of theirbroader portfolio. These types of deals are also highly
idiosyncratic, requiring a lot of time and data analysis

to be successful for both GP and LPs.73 The potential
for misalignments in strategy or incentives between
GP and LP investors has led to greater scrutiny from
regulators who are examining such practices.74, 75

Potential sources of embedded leverage
Leverage is unsurprisingly a key component of LBOs.
However, some forms of leverage are more transparent
than others. For example, subscription lines – lines ofcredit collateralized by the capital commitments of LP
investors – are used during the funds’ investment phaseto smooth cash flows or capital calls.76, 77 They are acommon funding tool for GPs and can help funds
take advantage of short-term dislocations and limit
the need for frequent capital calls. However, disclosureof these lines of credit is neither standardized nor
required. If misused or undisclosed, subscription lines
have the potential to be a source of hidden leverageand distort performance metrics.78

higher levels of loss-absorbing capital can leave LPs
facing higher risks of future capital calls in a down
market when they may not be receiving distributions.
LP investors should be aware of the potential for
misuse of these subscription lines and seek greater
detail around how they are used from their GPs.
Indeed, the lack of transparency around these lines andother sources of hidden leverage has drawn increased
interest from investor groups as well as US regulators.84

Among alternative
investments, VC funds have
lagged in risk-adjusted returns
after fees since 2000.

While typically used as a form of bridge financing
between capital calls, this form of credit has exploded
recently to more than $400 billion. Furthermore, thetenor of subscription lines has increased from 90 days
to over 360 days – suggesting they may be used formore than merely smoothing quarterly capital calls.79
Use of subscription lines can also distort performance
metrics.80 The rates of return for PE funds are basedon the cash flows they generate for the investor. Thatis, capital calls are outflows for the investor and capital
distribution are inflows. Therefore, investing borrowed
money in lieu of committed capital enhances some
performance metrics by artificially reducing time
between cash out and inflows.81

3.. econsider the role of venture capitalin a portfolio

Furthermore, use of subscription lines may also limit
LPs’ flexibility and access to secondary markets.
Commitments made by the GP to a subscription line
may prevent LP investors from executing a sale of theirstake, for example.82

While venture funds are constructed around outsized
returns from a small fraction of their portfolios, thesurge of investment in the space has driven valuations
to unattractive levels – especially in some areas oftechnology – and forced VC funds into betting on
winner-take-all network effects in speculative markets.
This has strained recent vintages. In the US alone,companies lost billions as they were forced to take ahaircut to their valuation during funding rounds in
2022, a so-called “down round.”89

If used aggressively, and without proper disclosure,subscription lines can create hidden risks for LPs.
Undisclosed subscription lines would boost metricsof return but would not impact leverage metrics,
for example.83 Additionally, greater leverage without

Venture capital funds have long been a part ofinstitutional investor portfolios. The prospect ofinvesting early in the next tech superstar firm andreaping exponential returns on investment has a strong
appeal. However, the reality is a bit more nuanced.
Among alternative investments, VC funds have lagged
in risk-adjusted returns after fees since 2000.87, 88
The acceleration of tech adoption following the
COVID-19 pandemic ignited the speed and scaleof VC dealmaking. From March 2020 to December
2021, investment grew by a staggering $500 billion.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 29

Despite its underwhelming performance, venture
capital can play a role in an institutional portfolio. For
example, later-stage VC and growth investing may offer
more attractive risk-return characteristics for investors.
They typically involve proven technologies that arefinding pragmatic, real-world applications and evengenerating revenues from actual paying customers.
Furthermore, access and insight into the frontiersof technology and its applications can be helpful
for long-term investors, providing a glimpse into
potential areas of future technology disruption.
Forward-thinking CIOs can leverage the visionand market intel of VC management and portfolio
companies to identify potential targets of disruption
in other parts of their portfolio.
The fastest-growing VC markets are in Asia. Since
2012, Asia’s VC AUM has increased tenfold to $1.3
trillion, far outpacing their European peers and almost
as large as the United States. This is driven in part by
the fact that venture capital allows investors to gain
direct exposure to small businesses in developing
markets. Public markets, by contrast, tend to be
dominated by large state-owned or multinational firms
and may not represent the underlying dynamic local
economy. Furthermore, these investments also provide
access to economies that are becoming an ever-larger
share of global GDP in combination with a regulatoryenvironment that is often more amiable to startups
and entrepreneurs.

4. Renewable and digital infrastructure provide
global equity opportunities
Because infrastructure is not easily substituted andoften operates with economies of scale, it can offer
several attractive investment features including
relatively low volatility, stable cash flows, inflation
protection and low correlation to other investments.
Infrastructure is also well suited for the current
macroeconomic environment given the defensive
characteristics of essential assets and the embedded
inflation hedging. As investors look across the
spectrum of infrastructure equity categories –ranging from secure core investments all the way toopportunistic investments in emerging markets ordevelopment projects – we believe they should pay
particular attention to opportunities in renewables anddigital infrastructure.*

Infrastructure is well suitedfor the current macroeconomic
environment given its defensive
characteristics and embedded
inflation hedging.
Renewables and the push to decarbonization
To meet net zero emission targets, the global energy
mix will need to shift from two-thirds fossil fuels
today to two-thirds renewable power by 2050.88
This transition will drive sustained growth and leadto attractive opportunities in the renewables sector–
including solar, wind and hydro-electric, as well asadjacencies such as storage and transmission. The
continued commitments by governments, including
the 2022 Inflation Reduction Act in the US and the2021 European Green Deal, will further amplify
this transition.
Europe has led the world in renewable adoption andfuture investment opportunities are likely to remainrobust, despite the near-term instability and supply
shocks resulting from the war in Ukraine. Meanwhile,
North America is expected to meet or exceed Europe
in terms of future capital expenditures as it catches up
in renewable energy adoption – which increasingly is
cost competitive with traditional fossil fuel options.
In Asia, the opportunity is more nascent. While
China’s renewable investments are substantial, they arelargely not accessible to foreign institutional investors.
Globally, while increased demand for renewable
funds has led to greater competition for developed
market renewable assets, in turn compressing returns,* Depending on how broadly infrastructure is defined, there are $20-50 trillion of infrastructure assets globally, of which $10 trillion are privately owned.

30 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Exhibit 18: Cloud infrastructure services spending
US$ Billion
$178

$130
$96
$69
$47

2017

2018

2019

2020

2021

Source: Synergy Research

we believe that renewable returns over the cycle
will remain attractive to investors globally – acrossboth equity as well as the debt required to support
the continued high levels of sponsor activity in the
renewables space.

As renewables ramp up, there
will be opportunities in adjacentareas such as energy storage andlow-carbon hydrogen.
Longer term, as renewable power generation ramps up,
there will also be opportunities in adjacent areas suchas energy storage, floating platform offshore wind,
low-carbon hydrogen, carbon capture and storageand modular nuclear. New energy policies, especiallythose promoting energy security, together withincreasing cost competitiveness, will likely accelerate
adoption of renewable energy in the US and the EU.
As power generation continues to shift to renewablesources, storage capacity and mechanisms to easily
integrate renewable energy into the broader power grid
efficiently becomes crucial.

Digital infrastructure
The societal changes resulting from Covid-19
have accelerated the pace of digitization. Digital
infrastructure – which includes data centers, fiber
networks, cell phone towers and satellites – underpins
this trend and can offer attractive opportunities
for investors.
For example, more businesses, universities andgovernments are moving away from enterprise-based
data storage and towards the public cloud ecosystem.
Globally, annual spending on public cloud services
reached $178 billion in 2021 – a nearly 40% increase
from the prior year (Exhibit 18).
Data centers to support cloud computing are essential
digital infrastructure with growing global demand.
Within the sector, demand for hyperscale data
centers - large-scale facilities that cater to the global
cloud providers and tech companies like Alibaba
Cloud, Azure, AWS and Google – has been especiallystrong.89 Increasingly, these cloud providers arelooking for others to develop, build and operate data
centers for them.
From an investment perspective data centers straddle
both real estate and infrastructure and offer attractive
features of both, including relatively steady income

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 31

and low correlation to other investments. Data centersthat are mature and operating with a long-term
dedicated client in place may be especially attractive
for long-term investors.
Hyperscale data centers require sizable tracts of land,
specially designed buildings with thicker floors andhigher ceilings. They also require a reliable and ample
supply of power to run both the servers and theintensive cooling systems.
For investors, attractive opportunities for developing
hyperscale data centers lie in the United States andEurope. In the US, areas like Northern Virginia andSilicon Valley have a well-established data center
presence. However, markets like Phoenix and Chicago
offer attractive opportunities given the availability ofland and power. In Europe, the market is less matureand there are promising opportunities for demand

32 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

growth in major urban areas like Paris, Frankfurt
and Amsterdam. However, supply in these areas may
be constrained by ESG considerations and some
limitations on land and power use.

Chapters 2 and 3 analyzed the changing
dynamics and resulting investment
opportunities within private equity andprivate credit markets. However, thealtered private markets landscape also has
important implications across the entire
investment portfolio. Chapter 4 turns to these
implications and proposes a portfolio-wide
action plan for CIOs.

CHAPTER 4

PORTFOLIO IMPLICATIONS“The seismic shift in private markets
has long-term implications acrossthe entire portfolio.”

EXPLORE CHAPTERS

1

2

3

4
PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 33

CHAPTER 4

PORTFOLIO IMPLICATIONSThe evolving private market landscape raises important considerations for CIOs thinking about long-term
implications across their entire portfolio, beyond the specific asset class opportunities discussed in previous
chapters. We believe CIOs should evaluate four areas as they think about the cross-portfolio implications of the
new dynamics of private capital markets.

1. Consider more flexible investment
approaches given blurring lines acrosspublics and privates
The distinctions between public and private markets
have grown hazier. Correspondingly, the demarcationsat large institutional investors between the public fixedincome, private credit, public equity and private equity
groups are getting increasingly blurred as well. Thisphenomenon increases the need for discussion andcollaboration across investment, manager selection andresearch teams.
For example, investors use cash flows from private corereal estate as a substitute for interest coupons fromtheir corporate bond portfolios. The once bright linethat separated broadly syndicated loans and private
markets has become obscure as private lenders now havesufficient scale to compete for billion-dollar loan deals.
Privately structured and unrated securitizations now
happen outside of banks routinely and are customized
for investors rather than distributed in publicmarkets. And several public equity players have strong
relationships, privileged access and existing investments
in high-potential pre-IPO private companies.90
These blurring lines can present new risks for investors.
For example, with LBO-driven sponsored lending
dominating direct lending, asset allocators need tobe mindful of overlapping exposures and potential
correlations between their private credit and private
equity allocations.

34 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Likewise, investors need to be aware of the evolving
opportunity set as well. At a minimum, CIOs will wantto ensure regular communication (both formal andinformal) between their public and private in-house
analyst teams. Doing so allows each team to develop afuller “360 degree” view of their respective asset class.
This broader and more complete perspective can makeit easier to identify opportunities at the intersection of
public and private markets as well as correlated risks andexposures across public and private investments.
Institutional investors are increasingly considering
multi-asset or “blended” investment mandates withfewer boundaries that allow managers to seek out themost attractive risk-return opportunities across bothpublic and private markets. For example, a broad fixedincome mandate can allow managers to assess relativevalue and invest across public fixed income, real estate
debt, structured products and private credit. Similarly,
in real estate, allocations that are agnostic to debt orequity can allow asset managers to survey the entire
capital stack, take advantage of dislocations in relative
pricing and be opportunistic as markets adjust.

2. A more sophisticatedunderstanding of liquidity risk in
private assets is essential
A fundamental question for endowments, pensions
and other investors is: What is the optimal allocation
to private markets? Portfolio liquidity is a relevantconstraint for investors with substantial allocations
to private assets. Investments in private equity funds,
for example, can be locked up for several years before
investors receive any distributions. This may make it
difficult for pension plans to meet their obligations
and allow for unexpected outflows – like capital callsfrom PE fund managers.
A comprehensive portfolio framework that spans asset
classes and time periods could be insightful for CIOs
and enable them to better understand the liquidity
challenges around investing in private markets.91 A
framework that can be customized for an individual
portfolio would be ideal. It would bring together
a portfolio’s overall public and private market asset
allocation, a private asset commitment history, aforward-looking commitment strategy as well as
unique portfolio liquidity demands. Such an analyticalframework could be used to stress test portfolios under
different market and economic circumstances andwould bring embedded liquidity risk to the forefront.
Combining these factors in an analytical model would
enable CIOs to form a thorough understanding of the
tradeoff between overall liquidity risk and performance

However, ESG considerations are now increasingly
influencing private markets as well. About 70%
of global private equity LP investors say theirorganization’s investment policies include ESG
aspects.92 A growing number of investors are also
looking to achieve ESG objectives with the private
asset portions of their portfolios. For their part, PE
firms and private credit funds are responding toinvestors’ desires and even creating funds with explicit
ESG mandates.93 Over 40% of the largest PE fundmanagers say they consider ESG issues either seriously
or very seriously when making investment decisions.94
This ESG momentum is altering the private market
landscape in several ways:•

ESG-minded investors are joining portfolio
companies’ employees and customers in stressing
the need for more detailed reporting andaccountability. As more investors push their GPs
and credit fund managers for metrics of risk,
impact, sustainability and equity, they have driven
greater disclosure and reporting from private
fund managers.95
Investors are not the only ones pushing private
markets to be more transparent. Regulators arealso expanding their mandate for climate-related
reporting. The U.K., for example, recently
expanded climate-related risk reporting to all firms
with over 500 employees, regardless of the firm’s
corporate structure or ownership.

Portfolio liquidity is a relevant
constraint for investors with
substantial allocations to
private assets.

3. ESG is only beginning to shapeprivate markets
It is conventional wisdom that private markets are farless exposed to ESG pressures than public ones. For
starters, reporting mandates for climate-related risks
rarely extend beyond publicly traded companies. The
resulting lack of transparency and relevant data has
deterred some ESG-minded investors from private
markets. Second, climate activists have typicallyfocused on commercial banks and asset managers
that tend to be more sensitive to reputational risk andnegative headlines.

Better transparency and reporting fromprivate markets•

Investors can have more direct andmeasurable impact
Since private equity (and, in some cases, debt
investors) have greater influence over portfolio
firms’ practices and operations, they canpotentially achieve greater and more direct impact.
Often portfolio companies have fewer resources tomanage their environmental and social impacts,
such as carbon footprint or equity and inclusion
initiatives. A growing number of ESG-minded
investors are therefore seeking private fundswith the operational capabilities to assist theirportfolio companies in achieving improvements

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 35

in environmental, social and governanceperformance. Almost 40% of all private equity
investors said they invested in ESG-related
products in 2022, up from 33% the prior year.96
With a limited number of investors and direct
involvement in the operation of a business,
private equity in some ways provides the ideal
circumstances for an ESG-minded investor toachieve their objectives. PE owners, for example,
can utilize their operational control to drivechanges that enhance sustainability or implement
diversity initiatives. Similarly, venture capital funds
can seed investment in disruptive technologies thatare addressing the green transition.

4. Explore integrating privates into
defined contribution plans over thelong term
There has been an increasing focus on creating
responsible paths for retail investors to participate in
the opportunities available in private markets. This
clearly means ensuring retail investors are aware of thelonger time horizons and the illiquidity of investments
in private markets – and that they understand thecomplexity of some corners of these markets.
Defined contribution (DC) plans may be one place
where the illiquidity of private assets may be less of
an issue for retail investors. Most plan participants,
especially younger employees, are using their DC

plans to save for a retirement that may be decades in
the future. This kind of long-term investment horizon
aligns well conceptually with the committed capital
structure of private markets. CIOs with responsibilities
that straddle both defined benefit and defined
contribution retirement plans – in countries such as
the US, U.K. and Australia – should look for ways toresponsibly incorporate private market investments
into DC plans, just as they have in their defined
benefit plans.
The benefits of making private alternatives accessible
to individual investors are apparent – “democratizing”
private market access just as the investment
opportunity set in public markets may be shrinking,for example. Additionally, incorporating private assets
into retirement plans may allow for a more reasonable
fee structure for individual investors. One area whereplans have started incorporating private assets is corereal estate. This is already available in some retirement
plans via target date funds and can provide growth
opportunities for younger retirement investors as wellas inflation-hedging and income generation for those
approaching or already in retirement.
However, significant challenges to widespread
implementation in DC plans remain. For example, theliability risks and uncertainties in the US around actual
implementation are still prohibitive for private equity –despite some clarity from authorities in 2020.97 Indeed,
retirement schemes that are professionally managed –like Australia’s superannuation fund or the U.K.’s mastertrusts – may be most suitable for private investments
and provide the best opportunities for implementation.

Conclusion
Capital markets have evolved significantly over the last 20 years – and at an accelerated pace since theGFC. Firms today have a different set of options available to finance growth and expansion at every stage of
their development. At PGIM, we believe these developments have important implications for institutional
portfolios and are changing the investment calculus in meaningful ways (Exhibit 19).
Though only time will tell how capital markets evolve over the next 20 years as they navigate market cycles
and geopolitical upheavals, one thing is clear: Private markets will remain a key source of financing for awhole range of innovation and economic activity globally. It is up to investors and their asset managers
to have the short-term flexibility and the long-term vision to capture the new opportunities available indeepening and growing private markets while also navigating the unique risks.

36 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Exhibit 19: Summary of Investment Implications
PRIVATE CREDIT INVESTMENT IMPLICATIONS
1. Manage credit exposure
holistically••

The lines between public and private credit markets are increasingly blurring, (e.g., private direct lenders moving into broadly
syndicated market)
Investors need to view their entire credit exposure collectively to capture opportunities and to fully understand overlapping
risks and correlations

2. Look beyond sponsoredlending••

Attractive investment opportunities in private lending lie beyond the crowded segment of sponsor-backed deals
Seek out direct lending platforms that can source non-sponsored deals and have a strong underwriting and credit trackrecord across multiple market cycles

3. Energy infrastructure offers
unique opportunities••

Smaller firms are disproportionately impacted by banks retreating from the conventional energy sector
For investors whose ESG policies permit, structured loans on proven wells can offer attractive coupons and added upside
protection in the form of equity or royalties•

Despite the novelty of more “exotic” niches of specialized lending, their credit scoring models have yet to be tested through afull credit cycle (e.g., “buy-now-pay-later” models)Traditional structured products – such as CLOs and CMBS – offer tested credit models and structures as well as favorable
capital treatment

4. Traditional structured
products
5. Multifamily rental housing•••

Post-COVID trends – including a surge in household formation and elevated global home prices – provide a favorable macro
backdrop for multifamily rental housing
Multifamily also offers debt investors some inflation protection and better performance through a credit cycle

PRIVATE EQUITY INVESTMENT IMPLICATIONS
1. Secondary markets
create new flexibility andopportunities•

2. Closely monitor PE fundpractices and structures•

3. Reconsider the role of VC in
the portfolio••

VC risk-adjusted returns have lagged other private market strategies since the early 2000s.
However, CIOs can benefit from the vision and market intel of VC management and portfolio companies to identify potential
vulnerabilities and targets of disruption in other parts of their portfolio

4. R enewable and digital
infrastructure provides
global opportunities••

As renewable power ramps up, there are opportunities in adjacent areas such as energy storage and low-carbon hydrogen
Hyperscale data centers – large-scale facilities that cater to the biggest cloud providers and tech companies – offer
attractive investment opportunities globally••

In addition to creating liquidity, secondary transactions provide a portfolio management tool to rebalance, implement a change
in investment strategy or dampen the J-curve of primary funds
Secondary markets can create opportunities for buyers who can provide liquidity in times of market uncertainty and elevateddiscount to net asset values
Restructuring and continuation funds involve value transfers that may create potential for misaligned incentives between GP
and LP that need to be evaluatedIf misused or undisclosed, subscription lines can distort performance metrics and be a source of embedded leverage

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 37

PORTFOLIO-WIDE INVESTMENT IMPLICATIONS
1. Blurring lines require
more flexible investment
approaches•

2. A more sophisticatedunderstanding of
liquidity risk••

As investments in private markets grow, so do questions around portfolio liquidity and optimal allocations
A customized portfolio framework that spans asset classes and time periods can enable a deeper understanding of
portfolio liquidity risk

3. ESG is beginning to shapeprivate markets••

ESG-minded investors are driving change around detailed disclosures and more accountability
Direct ownership and control can provide ideal circumstances for an ESG-minded investor to achieve impact
objectives and goals

4. P rivate assets in defined
contribution retirement plans••

The benefits of making private alternatives accessible to individual investors are apparent
Liability risks and uncertainty provide high hurdles; CIOs should look for ways to responsibly incorporate private
market investments into defined contribution plans•

Investors need to reconsider their approach to investment analysis and decisions as the lines between public andprivate capital markets are increasingly blurring
This requires better collaboration between analyst teams and potentially a re-evaluation of public-private
boundaries in investment mandates

Any information herein represents the views and opinions of the PGIM Inc as of the date of issuance (or such earlier date as referenced
herein) and is subject to change without notice. PGIM Inc cannot guarantee the future outcomes, nor any changes in market conditions.

38 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIMACKNOWLEDGMENTS
PGIM gratefully acknowledges the contributions of the following individuals:
Dr. Fernando Alvares, Alexandre Lamfalussy Senior Research Fellow, 2020 - Bank for International Settlements &Saieh Family Professor, Department of Economics, University of Chicago
Michael Anderson, CFA, Head, US Credit Strategy, Citi
Dr. Sirio Aramonte, Senior Economist, Monetary & Economic Unit, Bank for International Settlements
Frances Beyers, Head, Capital Markets Group, Cliffwater
Dr. Greg Brown, Professor of Finance, Executive Director at Kenan Institute of Private Enterprise & Research
Director of Institute for Private Capital, UNC Kenan-Flagler
Victoria Cheng, Partner, PruVen
Dr. Peter Cornelius, Managing Director & Chief Economist, Alpinvest
Dr. Barry Griffiths, Partner & Co-Head of the Quantitative Research Group, Client Solutions, Ares Management
Ramneek Gupta, Founder & Managing Partner, PruVen
Dr. Victoria Ivashina, Lovett-Learned Professor of Finance & Head of the Finance Unit,
Harvard Business School
Lotfi Karoui, Chief Credit Strategist, Goldman Sachs
Matthew James, Managing Director, Strategist, Head of Global Spread Products Research, Citi
Shawn Munday, Executive Director, Institute for Private Capital, UNC Kenan-Flagler
Stuart Odell, Investment Committee Member, St. Ignatius College
Dr. David Robinson, PhD, Professor of Finance and J. Rex Fuqua Distinguished Professor of International
Management - Duke University, Fuqua School of BusinessTravis Skelly, Partner, PruVen

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 39

PGIM Contributors
Stephen Bailey, PGIM Real Estate

Jonathan Kohana, PGIM Real Estate

Matt Baker, PGIM Private CapitalMorgan Laughlin, PGIM Real Estate

David Blanchett, PGIM DC Solutions

Eduard Lemle, Montana Capital

Chuck Bewalder, PGIM Investments

Alfred Lerman, PGIM Portfolio Advisory

Jackie Brady, PGIM Real Estate

Anthony Ma, PGIM Private Capital

Edward L. Campbell, PGIM Quantitative Solutions

Mark Mangum, PGIM Private CapitalMark Chamieh, PGIM Real Estate

Bryan McDonnell, PGIM Real EstatePeter Clark, Jennison Associates

Lee Menifee, PGIM Real Estate

Josh Cohen, PGIM DC Solutions

Mark Negus, PGIM Real Estate

Tony Coletta, PGIM Private Capital

Mikaylee O’Connor, PGIM DC Solutions

Jeff Dickson, PGIM Private Capital

Dr. Harsh Parikh, PGIM IAS

Matt Douglas, PGIM Private Capital

Greg Peters, PGIM Fixed Income

Dr. Guillermo Felices, PGIM Fixed Income

Andrew Radkiewicz, PGIM Real Estate

Anina Fraser, PGIM

Keshav Rajagopalan, PGIM Portfolio Advisory

Katherine Fuszner, PGIM Private Capital

Jacquelin Renda, PGIM Private Capital

Susan Garrett, Prudential Financial

Gabriel Rivera, PGIM Fixed Income

Richard Greenwood, PGIM Fixed Income

Marcella Sivilotti, PGIM

Matt Harvey, PGIM Private Capital

Dr. Gavin Smith, PGIM Quantitative Solutions

Dr. Peter Hayes, PGIM Real Estate

Dr. Michelle Teng, PGIM IAS

Debra Hemsey, , PGIM Private Capital

Al Trank, PGIM Private Capital

Jonathan Holt, PGIM Portfolio Advisory

John Vibert, PGIM Fixed Income

David Hunt, PGIM

Henri Vuong, PGIM Real Estate

Eugenia Jackson, PGIM

Dr. Noah Weisberger, PGIM IAS

Ed Keon, PGIM Quantitative Solutions

Principal Authors
Shehriyar Antia, PGIM Thematic Research
Dr. Taimur Hyat, PGIM
Jakob Wilhelmus, PGIM Thematic Research

40 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

Endnotes
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marketintelligence/en/news-insights/latest-news-headlines/some-regional-banks-back-off-oil-and-gas-lending-56939381 >49. Halbout, Jérôme and Riboud-Seydoux, Marie-Noëlle, “Financing of Energy Investment,” Springer, May 2022. < https://link.springer.com/chap
ter/10.1007/978-3-030-86884-0_17 >50. Ramnarayan, Abhinav and Arroyo, Carmen, “Funding Squeeze at Buy-Now-Pay-Later Pioneer Flashes Industry Warning,” Bloomberg, June 7, 2022. <https://www.bloomberg.com/news/articles/2022-06-07/buy-now-pay-later-lender-affirm-sees-loan-package-value-plummet >51. Johnson, Jennifer, “Collateralized Loan Obligations (CLOs) Primer,” NAIC’s Capital Markets Bureau, 2018. < https://content.naic.org/sites/default/
files/capital-markets-primer-collateralized-loan-obligations.pdf >52. García, Daniel and Paciorek, Andrew, “The Remarkable Recent Rebound in Household Formation and the Prospects for Future Housing Demand,”
Board of Governors of the Federal Reserve System, May 6, 2022. < https://www.federalreserve.gov/econres/notes/feds-notes/the-remarkable-recentrebound-in-household-formation-and-the-prospects-for-future-housing-demand-20220506.html >53. Curran, Enda, “The World’s Bubbliest Housing Markets Are Flashing Warning Signs,” Bloomberg, June 21, 2022. < https://www.bloomberg.com/news/
features/2022-06-21/cooling-real-estate-markets-in-us-uk-risk-deeper-global-economic-slump >54. “Global Outlook: Investing Through Uncertainty,” PGIM Real Estate, May 2022.
55. Barry, David, “Buyout dry powder rises,” Markets Group, June 2, 2022. < https://www.marketsgroup.org/news/Private-Equity-Dry-Powder >56. Zhang, Hannah, “Up-and-Coming Managers Don’t Always Outperform,” Institutional Investor, Sept. 13, 2021. < https://www.institutionalinvestor.
com/article/b1tkvwp5jlty3m/Up-and-Coming-Managers-Don-t-Always-Outperform >57. Mendoza, Carmela, “Emerging Managers: New Blood? Not Just Yet,” Private Equity International, Dec. 1, 2021. < https://www.privateequityinternational.com/emerging-managers-new-blood-not-just-yet/ >58. “Private Funds Statistics,” SEC, July 2022. < https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q4.pdf >59. Mende, Jochen, Marks, Joseph, and Perembetov, Kairat, “Introductory Guide to Investing in Private Equity Secondaries,” CAIA, 2016. < https://caia.org/sites/default/files/AIAR_Q3_2016_01_Secondaries.pdf >42 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

60. Ibid.
61. Global Secondary Market Review, Greenhill, 2022.
62. Witkowsky, Chris, “KKR’s Internet Brands, Valued at More Than $12B, Completes GP-Led Secondary,” Buyouts, July 20, 2022. < https://www.buyoutsinsider.com/kkrs-internet-brands-valued-at-more-than-12bn-completes-gp-led-secondary >63. Evans, Steve, “Apollo Completes Merger With Athene, Lifting Market Cap to $43B,” Reinsurance News, Jan. 3, 2022. < https://www.reinsurancene.ws/
apollo-completes-merger-with-athene-lifting-market-cap-to-43bn >64. “KKR Closes Acquisition of Global Atlantic Financial Group Limited ,” Global Atlantic, Press release, Feb. 1, 2021. < https://www.globalatlantic.com/
news/KKR-closes-acquisition-of-Global-Atlantic-Financial-Group-Limited >65. Zhang, Hannah, „Private equity is taking a long, hard look at insurance. So far, It likes what is sees.” Institutional Investor, Feb. 2, 2022. < https://www.
institutionalinvestor.com/article/b1wlncb3wkd7hq/Private-Equity-Is-Taking-a-Long-Hard-Look-at-Insurance-So-Far-It-Likes-What-It-Sees >66. Johnson, Jennifer and Carelus, Jean-Baptiste, “Private Equity-Owned USInsurer Investments as of Year-End 2020,” National Association of InsuranceCommissioners, 2021. < https://content.naic.org/sites/default/files/capital-markets-special-report-private-equity-owned-2020.pdf >67. Kruppa, Miles, “Sequoia Borrows Wall Street’s Playbook in Chase for ‘Permanent Capital’,” Financial Times, Nov. 4, 2021. < https://www.ft.com/
content/0015e0b3-4664-4ead-a2b9-a4a193ce2bc0 >68. Serenelli, Luigi and Hoekstra, Tjibbe, “Pension Funds Expected to Become Largest Sellers on Private Equity Secondary Market in H2,” Investment& Pensions Europe, Aug. 23, 2022. < https://www.ipe.com/news/pension-funds-expected-to-become-largest-sellers-on-private-equity-secondary-market-in-h2/10061708.article >69. “Finding Opportunity in Secondaries,” Blackstone, May 2021. < https://pws.blackstone.com/wp-content/uploads/sites/5/2021/05/FindingOpportunity-in-Secondaries-End-Client.pdf >70. Bratton, William, “Private Equity’s Three Lessons for Agency Theory,” Brooklyn Journal of Corporate, Financial & Commercial Law, Volume 3, Issue
1, 2008. < https://brooklynworks.brooklaw.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1132&context=bjcfcl >71. “GP-Led Secondary Fund Restructurings,” Institutional Limited Partners Association, April 2019. < https://ilpa.org/wp-content/uploads/2019/04/
ILPA-Guidance-on-GP-Led-Secondary-Fund-Restructurings-Apr-2019-FINAL.pdf >72. Singh, Preeti, “KKR Looks for Around $2 Billion for Portfolio Company Internet Brands,” The Wall Street Journal, Feb. 8, 2022. < https://www.wsj.
com/articles/kkr-looks-for-around-2-billion-for-portfolio-company-internet-brands-11644366088 >73. Farman, Madeleine, “Transparency Is Key to Avoiding Failed GP-Led Secondaries,” S&P Global, Feb. 17, 2020. < https://www.spglobal.com/
marketintelligence/en/news-insights/latest-news-headlines/transparency-is-key-to-avoiding-failed-gp-led-secondaries-57054834 >74. “GP-led Secondaries,” Capital Dynamics, May 2022. < https://www.capdyn.com/Customer-Content/www/news/PDFs/Capital_Dynamics_-_GPled_Secondaries.pdf >75. Johnson, Justin and Rucker, Chad, “SEC could take fairness opinions from ‘nice to have’ to ‘must have’ for continuation funds,” Secondaries Investor,
April 19, 2022. < https://www.secondariesinvestor.com/sec-could-take-fairness-opinions-from-nice-to-have-to-must-have-for-continuation-funds/ >76. Schillinger, Pierre, Braun, Reiner, and Cornel, Jeroen, „Distortion or Cash Flow Management? Understanding Credit Facilities in Private Equity
Funds,” SSRN, February 2020. < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3434112 >77. Kazemi, Hossein, “Subscription Line of Credit: Benefits, Risks, and Distortions,” CAIA Association, Sept. 29, 2020. < https://caia.org/
blog/2020/09/29/subscription-line-of-credit-benefits-risks-and-distortions >78. “Enhancing Transparency Around Subscription Lines of Credit,” Institutional Limited Partners Association, June 2020. < https://ilpa.org/wp-content/
uploads/2020/06/ILPA-Guidance-on-Disclosures-Related-to-Subscription-Lines-of-Credit_2020_FINAL.pdf >79. Schillinger, Pierre, Braun, Reiner, and Cornel, Jeroen, „Distortion or Cash Flow Management? Understanding Credit Facilities in Private Equity
Funds,” SSRN, February 2020. < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3434112 >80. Kazemi, Hossein, “Subscription Line of Credit: Benefits, Risks, and Distortions,” CAIA Association, Sept. 29, 2020. < https://caia.org/
blog/2020/09/29/subscription-line-of-credit-benefits-risks-and-distortions >81. Ibid.
82. Silveira, Mark, “Line Dance: The Rise of Subscription Credit Lines in Private Funds,” MJ Hudson, Feb. 2019. < https://mjhudson.com/line-dance-therise-of-subscription-credit-lines-in-private-funds/ >83. “Subscription Lines of Credit and Alignment of Interests,” Institutional Limited Partners Association, June 2017. < https://ilpa.org/wp-content/
uploads/2020/06/ILPA-Subscription-Lines-of-Credit-and-Alignment-of-Interests-June-2017.pdf >84. Croce, Brian, “SEC Targets Hedge Funds, Private Equity for Enhanced Reporting Requirements,” Pensions & Investments, Aug. 10, 2022. < https://www.pionline.com/regulation/hedge-funds-private-equity-face-expanded-reporting-requirements-new-sec-proposal >85. Parikh, Harsh and Cheng, Tully, “Revisiting the Role of Alternatives in Asset Allocation,” CAIA Association, June 2017. < https:/caia.org/sites/default/
files/02_revisiting-the-role-of-alt_9-14-17.pdf >86. Korteweg, Arthur, “Risk Adjustment in Private Equity Returns,” Annual Review of Financial Economics, 2019. < https://www.marshall.usc.edu/sites/
default/files/korteweg/intellcont/annurev-financial-110118-123057-1.pdf >87. Saini, Manya, “Dreaded ‘Down Rounds’ Shave Billions Off Startup Valuations,” Reuters, Aug. 9, 2022. < https://www.reuters.com/business/dreadeddown-rounds-shave-billions-off-startup-valuations-2022-08-09/ >PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 43

88. “Global Energy Transformation,” International Renewable Energy Agency, 2018.
89. Tilley, Aaron, “Amazon, Microsoft, Google Strengthen Grip on Cloud,” The Wall Street Journal, Jul. 5, 2022. < https://www.wsj.com/articles/amazonmicrosoft-google-strengthen-grip-on-cloud-11657018980 >90. O’Neal, Lydia, “Digital Freight Broker Convoy Weighs Potential IPO After Hitting $3.8 Billion Valuation,” The Wall Street Journal, April 21, 2022. <https://www.wsj.com/articles/digital-freight-broker-convoy-weighs-potential-ipo-after-hitting-3-8-billion-valuation-11650531600 >91. Shen, Junying and Teng, Michelle, “Harnessing the potential of private assets: A framework for institutional portfolio construction,” PGIM, June 2021.
92. Lino, Marc, Connolly, Liam, Hoverman, David, McCoy, Debra, Schey, Matthew and Anders, Samantha, “Limited Partners and Private Equity Firms
Embrace ESG,” Bain & Company, Feb. 17, 2022. < https://www.bain.com/insights/limited-partners-and-private-equity-firms-embrace-esg/ >93. Roumeliotis, Greg, “KKR to launch its two first ESG credit funds,” Reuters, July 8, 2022. < https://www.reuters.com/business/sustainable-business/
exclu-sive-kkr-launch-its-two-first-esg-credit-funds-2022-07-07/ >94. “Private Equity Can Further ESG Progress,” Buyouts, June 1, 2022. < https://www.buyoutsinsider.com/private-equity-can-further-esg-progress/ >95. Brennan, Jim, Shandal, Vinay, Brigl, Michael, Fischer, Greg, Stoffers, Maike and Remillard, Marielle, “How Private Equity Can Converge on ESG
Data,” Boston Consulting Group, Oct. 21, 2021. < https://www.bcg.com/publications/2021/private-equity-convergence-on-esg-data >96. “Private Equity Can Further ESG Progress,” Buyouts, June 1, 2022. < https://www.buyoutsinsider.com/private-equity-can-further-esg-progress/ >97. Croce, Brian, “DOL Letter, Intel Ruling Pave Way for Private Equity in DC Plans,” Pensions & Investments, Jan. 24, 2022. < https://www.pionline.com/defined-contribution/dol-letter-intel-ruling-pave-way-private-equity-dc-plans >44 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

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PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 45

PGIM’S MEGATREND SERIESHow today’s shifting global landscape will affect the investments of tomorrow

Cryptocurrency Investing
MEGATRENDS

The latest installment of PGIM’s Megatrends research series, Cryptocurrency Investing, explores
why direct investments in bitcoin and its peers are currently unattractive in an institutional
portfolio – underscored by recent gyrations in the crypto market. Still, the technologies thatcryptocurrencies helped spawn present new opportunities for savvy long-term investors.

CRYPTOCURRENCYINVESTING
Powerful Diversifier or Portfolio Kryptonite?

Learn more at at pgim.com/crypto

SUMMER 2022
For professional investors only.
All investments involve risk,
including possible loss of capital.
PGIM | CRYPTOCURRENCY INVESTING I

Reshaping Services
Technological disruption has finally reached the shores of the service economy. It’s a developmentthat will represent a major shift for investors and the global economy as services represent morethan two-thirds of global GDP, three-quarters of the workforce in developed markets, and nearly
half of the workforce in advanced emerging markets.
Learn more at pgim.com/reshaping

Weathering Climate Change
Climate change is no longer a hypothetical risk. It is already transforming the global economy,
reshaping markets and altering the investment landscape. In this paper, we propose an actionableclimate change agenda that addresses both hidden portfolio vulnerabilities and potential
opportunities in the transition to a lower-carbon world.
Learn more at pgim.com/climate

After the Great Lockdown
The pandemic has forced businesses to adapt in ways that will lead to lasting changes in consumer
behavior and corporate business models. Now is the time to focus on the massive disruption thatlies ahead so we’re best positioned for when the Great Lockdown has passed.
Learn more at pgim.com/lockdown

46 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

The Future Means Business
Disruptive forces have led to the emergence of three new business models that are radicallychanging the investment calculus for institutional investors. Here we explore the investment
implications of these transformative new corporate models.
Learn more at pgim.com/futurefirm

The Technology Frontier
We are living in an era of unprecedented technological change. At PGIM, we believe theimplications for investors will be profound, radically transforming investment opportunities acrossasset classes and geographies.
Learn more at pgim.com/tech

The End of Sovereignty?
Never before in history have people, information and capital moved across borders at the speed,frequency and volume we see today. In this white paper, we take a closer look at the escalating
tussle between globalization and nationalism, the implications this could have for global financial
markets, and how long-term investors may best position themselvesto navigate these uncertain times.

Emerging Markets at the Crossroads
A radical shift in the forces shaping emerging market growth will require investors to take adifferent investment approach from what may have worked in the past. Increasingly, discovering
investment opportunities will be rooted in the ability to capture alpha from the new growth drivers,
rather than in chasing the beta of the broad universe.

A Silver Lining
The unprecedented aging of the global population creates increased opportunities in senior
housing, multifamily condos, biotech, and the emerging silvertech industry. Institutional investors
should consider how this megatrend could affect their portfolios, given the trend’s evolving impact
on consumer spending and far-reaching effects on emerging nations, home to two-thirds of theworld’s elderly.

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 47

Longevity and Liabilities
The rise in global life expectancy has implications for pension plan liabilities that are not fully
appreciated. As new mortality tables demonstrate, longevity risk to pension liabilities could
increase dramatically over the next two to three decades. This report examines the challenge andthe available risk mitigation strategies.

The Wealth of Cities
Never in history has the pace of urbanization been so rapid: 60 to 70 million people moving
to cities every year for the next few decades. To help institutional investors benefit from this“prime time” of urbanization, we identified a range of specific investment ideas across the major
investable themes of this opportune megatrend.

48 THE NEW DYNAMICS OF PRIVATE MARKETS | PGIM

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 49

THE PURSUIT OF OUTPERFORMANCETM

PGIM | THE NEW DYNAMICS OF PRIVATE MARKETS 50ཻқࣆߴͤ ຌࣁྋͺธࠅ 6(& ͹ౌ࿧౦ࣁ‫ޒ‬໲ճऀͲ͍Ζ 3*,0 ΢ϱέ͗ࡠ੔ͪ͢΍͹Ͳͤɽͤ ຌࣁྋͺ৚ๅ఑‫ڛ‬Ν໪దͳͪ͢΍͹Ͳ͍Εɼಝఈ͹ۜ༧ঐ඾͹‫ש‬༢຤ͺ൤ജΝ໪దͳͪ͢΍͹Ͳͺ͍ΕΉͦΞɽΉͪɼຌࣁྋͶ‫͠ࡎى‬Η಼ͪ༲౵Ͷͯ͏ͱͺࠕ‫ޛ‬รߍ͠ΗΖ͞ͳ΍͍ΕΉͤɽͤ ‫͠ࡎى‬Ηͱ͏Ζࢤ৖ಊ޴౵ͺ‫Ͳ఼࣎ݳ‬͹‫ݡ‬մͲ͍Εɼ͞ΗΔͺࠕ‫ޛ‬รߍͤΖ͞ͳ΍͍ΕΉͤɽΉͪɼͨ͹݃Վ͹ࣰ֮੓Νන໎ͤΖ΍͹Ͳͺ͵͚ɼগཔ͹ࢤ৖‫ڧ؂‬͹รಊ౵ΝฯৄͤΖ΍͹Ͳ΍͍ΕΉͦΞɽͤ ຌࣁྋͶ‫͠ࡎى‬Ηͱ͏Ζࢤ৖‫ؖ‬࿊υʖν‫;ٶ‬৚ๅ౵ͺ৶བͲ͘Ζͳ൓இ֦ͪ͢झ৚ๅ‫͖ݱ‬Δ೘घͪ͢΍͹Ͳͤ͗ɼͨ͹৚ๅ͹ਜ਼֮੓ɼࣰ֮੓Ͷͯ͏ͱ౲ऀ͗ฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ գ‫ڊ‬͹ӣ༽ࣰ੹ͺචͥ͢΍গཔ͹ӣ༽੔Վ౵ΝฯৄͤΖ΍͹Ͳͺ͍ΕΉͦΞɽͤ ຌࣁྋͺ๑ແɼճ‫ܯ‬ɼ੭ແ৏͹Πχώ΢η͍Ζ͏ͺ౦ࣁਬও౵Νߨ͑ͪΌͶࡠ੔͠Ηͪ΍͹Ͳͺ͍ΕΉͦΞɽͤ ౲ऀͶΓΖࣆ઴টଡ଼͵͢Ͷɼຌࣁྋ͹Ҳ෨Ήͪͺસ෨Ν෵੣ͤΖ͞ͳͺ‫͕͚ݐ‬இΕ஗͢Ήͤɽ※ 本資料内で取り上げられた資産クラス、個別セクター等はあくまで例示目的であり、推奨ならびにこれらにかかる将来性を明示・暗示的に示唆するものではありません。
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