MEGATRENDSEXECUTIVE SUMMARYNEW DYNAMICS OFPRIVATE MARKETSInvestment Risks and Opportunities

Global pools of private capital – including private
equity, private credit and real assets – stand at over
$12 trillion, double the size from just six years ago.
What’s more, the complexity, breadth and influence ofprivate capital on markets and the global economy isgreater than ever.
Why should investors care about these shifting
dynamics? Quite simply, traditional models ofcompanies raising capital through bank loan officers
and stock 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.
To fully understand these new dynamics of private
markets and the resulting investment implications,
we have drawn on the insights of more than 40
investment professionals across PGIM’s private
alternatives, real estate, fixed income and equity
managers – as well as over a dozen leading academics,
investors and sell-side researchers.

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 | NEW DYNAMICS OF PRIVATE MARKETS | EXECUTIVE SUMMARY 1

WE IDENTIFY FOUR KEY FACTORS DRIVING THE
TRANSFORMATION OF PRIVATE CAPITAL MARKETS TODAY:

01
02
03
04

Banks and finance companies receding from riskier segments of lending
Over the last 20 years, regulatory changes and business model shifts have led banks –and several scaled specialty finance companies – to withdraw from riskier segments ofcorporate and real estate lending.

Investors seeking income and yield increase allocations to privates
The median share of private market assets for the world’s 10 largest institutional
investors is now 23%.

A growing number of business models are better suited for private markets
Some businesses can be better appreciated and funded via private markets. One example
is weightless firms – companies centered on intangible assets like proprietary softwareor other intellectual property. Another example is conventional fossil fuel companies,
which are increasingly relying on private capital markets as some ESG-minded investors
exclude the sector from their investment portfolios.

Companies are staying private longer
The median age of companies at IPO has more than doubled over the past two decades
to 11 years. This is driven by the growing availability of private capital at different
funding stages (e.g., not just venture but well into growth investment), but also theonerous disclosures and costs of going public, especially in developed markets.

PGIM | NEW DYNAMICS OF PRIVATE MARKETS | EXECUTIVE SUMMARY 2

PRIVATE CREDIT EXPANDS ITS REACH
1. Private credit is gaining share and moving to larger
deals in corporate lending
Over the last 20 years, banks’ share of business loans
has been cut in half to about 30% in 2021. In addition,
as private equity firms go upmarket and buy out larger
companies, both purchase multiples and the size of debt
facilities to support these deals have grown. Increasingly,
private credit players are displacing the broadly
syndicated loan market.

Investment Risks and Opportunities
1. Investors should evaluate their credit
exposure holistically
A credit risk approach that looks at private
credit separately from public is no longer
suitable due to the growing overlap andinterplay between the two segments.

2. Real asset debt is growing as an asset class
The amount of private capital deployed by private realestate and infrastructure debt funds has almost doubled
over the last eight years to $2.6 trillion.

2. Look beyond sponsored lending
Attractive investment opportunities in private
credit lie beyond the crowded sponsor-driven
segment where capital is less ample.

3. Specialized lending is maturing into an institutional
asset class
Deals that used to be structured by commercial banks
and distributed via public markets are finding their
way to non-bank structurers and private distribution
channels. Furthermore, issuers themselves are bypassing
banks and public markets altogether to directly tap into
select investors through private bespoke deals.

3. Energy infrastructure offers unique
opportunities
For direct lenders, the middle-market
segment of conventional energy in North
America offers intriguing opportunities ascapital can be scarce.

“

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

4. Newest segments of specialized lending
have yet to be tested
The AI-informed models underpinning
new fintech lenders have yet to be stressed
through a complete default cycle, whichraises concerns about the performance ofABS backed by them.
5. Housing is an enduring global trend forreal estateWith the price of individual homes surging inmajor urban areas globally, more households
are turning to multifamily rental housing.

PGIM | NEW DYNAMICS OF PRIVATE MARKETS | EXECUTIVE SUMMARY 3

PRIVATE EQUITY ENTERS A NEW PHASEWe define equity opportunities in private markets to include
venture, private equity, real estate and infrastructure and see
several forces at work re-shaping private capital:
1. PE leaders are separating from the pack as dry powderand deal size approach new highs
The median size of LBOs has doubled since 2011 from$48 million to $101 million today. In 2021, new VC
unicorns outnumbered IPOs in the US for the first time.
2. Private equity secondary markets are deepening
For LPs, the secondary market has proven to be aneffective tool for managing their growing private
portfolios – whether it’s a simple rebalancing of target
allocations or a major change in investment strategy.
The share of GP-led transactions – such as continuation
funds – has more than doubled over the past five years
and makes up almost 50% of all secondary volume.
3. The largest institutional investors are transitioning
from LPs to GPs
A handful of the largest investors, including CalPERS in the
US and Singapore’s Temasek, either have co-invested with
PE and VC firms or manage direct investments themselves,providing higher net returns through lower fees.
4. Private equity firms are seeking more permanentsources of capital
Permanent sources of capital reduce PE’s reliance on
perpetual fundraising. Several ways of accessing this are
emerging, including acquisitions of insurance firms andstructures tailored towards individual investors.

“

Some PE fund practices andstructures have the potential tomisalign GPs and LPs.”

Investment Risks and Opportunities
1. Secondary markets increase flexibility andcreate new opportunities

As private markets grow, so does theneed for portfolio rebalancing, fund
restructuring and liquidity options. For
secondary funds, secondary transactions
can provide low entry points for investment
as well as transparency into the identity of
portfolio companies and their track record.

2. Closely monitor fund practices and structures
Transfer of assets to continuation funds can bedone responsibly, but do have the potential tomisalign interests of GP and LP investors. Also,
if misused or undisclosed, subscription lines
can be a source of hidden leverage and distortperformance metrics.
3. Reconsider the role of venture capital in a
portfolio given performance challenges
Among alternative investments, VC fundperformance has lagged in risk-adjusted returns
net of fees since 2000. Nevertheless, perhaps
VC fund allocations can provide institutional
investors access and insight into the frontiers oftechnology and future disruption.
4. Renewable and digital infrastructure provide
global opportunities
As renewable-power generation ramps up, there
will be long-term opportunities in adjacent areas
such as floating platform offshore wind, lowcarbon hydrogen, and modular nuclear. Within
digital infrastructure, data centers to support
cloud computing are an example of a sector
seeing growing global demand. Within the sector,
demand for hyperscale data centers – large-scale
facilities that cater to the global cloud providers
and tech companies – has been especially strong.

PGIM | NEW DYNAMICS OF PRIVATE MARKETS | EXECUTIVE SUMMARY 4

PORTFOLIO IMPLICATIONS

01
02
03
04

Consider more flexible investment approaches given blurring lines acrosspublics and privates
The distinctions between public and private markets have grown hazier (e.g., the oncebright line that separated broadly syndicated loans and direct lending has become obscure).
Correspondingly, the once-clear boundaries between the public and private market investment
teams at institutional investors are getting increasingly blurred. This phenomenon increases
the need for cross-team analysis and evaluation of opportunities as well as potentially broader
investment mandates for managers that span both public and private realms.

A more sophisticated understanding of portfolio liquidity risk from private
assets is essential
A comprehensive portfolio framework that includes multiple time periods as well as moregranular models of the cash flows and contribution timing of private market assets can beused to stress test and model different market scenarios. These results can be compared withpublic market assets as well. This can enable CIOs to establish a deeper understanding of theliquidity characteristics of their private alternative portfolio.

ESG is only beginning to shape private markets
It is conventional wisdom that private markets lag their public counterparts in ESG
considerations. However, private market investors have an increasingly important roleto play in stressing the need for more detailed reporting of risk, impact, sustainability
and equity. Since private equity (and, in some cases, private debt) investors have broad
influence over portfolio firms’ practices and operations, they can potentially achieve
greater and more direct impact.

Explore integrating privates into defined contribution plans over the long term
There is an increased focus on creating a responsible path for retail investors toparticipate in private alternatives, especially in DC plans that have a long-term
investment horizon that potentially mirrors the longer lock-ups of private assets.
However, significant challenges to widespread implementation in DC plans remain.

PGIM | NEW DYNAMICS OF PRIVATE MARKETS | EXECUTIVE SUMMARY 5

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