Understanding Private Markets
Access to a growing asset class
What are Private Markets?
Private Markets encompass investments in companies and assets that are not publicly traded. These include:
- privately held companies
- physical infrastructure (e.g., energy, transportation, communications)
- real estate
- licensing and usage rights
- corporate lending
In the European Union, there are over 75 times more private than public companies (source: Eurostat). A large portion of economic value creation therefore takes place outside the stock markets. Today, many companies deliberately remain private for longer. This gives them the opportunity to grow more independently of short-term market sentiment and implement long-term strategies.
The main asset classes in Private Markets
Please be aware of the opportunities and risks associated with investing in Private Markets.
Private Equity involves investing in unlisted companies and actively developing them. Managers help these companies grow, operate more efficiently, or tap into new markets. Losses of the capital invested are possible if companies or projects do not perform as expected.
Examples:
- Consolidation platforms in the veterinary sector, where multiple clinics are merged into a larger provider.
- Manufacturers of premium pet food that are capitalizing on the trend toward the “humanization of pets.”
Private Infrastructure encompasses investments in essential assets such as energy, transportation, communications, and digital infrastructure. These assets are often critical to daily life and can provide stable, long-term returns. However, they may also result in losses.
Examples:
- Data centers in rapidly growing regions that are benefiting from digitalization and artificial intelligence.
- Energy supply infrastructure, such as facilities with secure access to electricity and water for industrial applications.
Private Credit refers to companies obtaining loans outside the traditional banking system. Private Credit financing typically features variable interest rates, and interest payments are regularly adjusted to a benchmark rate. This allows investors to benefit from rising interest rates and reduce the portfolio’s sensitivity to inflationary trends, which often lead to higher interest rates. The loans are often secured by stable income from long-term contracts. Losses of the capital invested are possible if companies or projects do not perform as expected.
Examples:
- Financing for a groundwater management provider offering services such as water purification or pump installations.
- Loans for industrial companies looking to expand their capacity or develop new services.
Royalties are shares of the ongoing revenue generated by certain assets. These include, for example, intellectual property or licensing rights. Investors receive a share of future revenue in return. Losses of the capital invested are possible if companies or projects do not perform as expected.
Examples:
- Shares of licensing fees from intellectual property, such as music rights or technology patents.
- Revenue shares from natural resources or other assets that generate regular income.
Private Real Estate refers to investing in commercial properties that generate recurring income. These properties can be leased on a long-term basis and are less dependent on short-term market fluctuations. However, there is also a risk of capital losses.
Examples:
- Modern logistics and warehouse facilities, which are in high demand due to the growth of online retail.
- Office or hotel properties that generate regular income through long-term leases.
How do Private Markets work?
Private Markets operate differently from public markets. Investors work directly with companies and can actively influence them. They are typically majority owners. They have full access to company data. This enables them to make informed decisions and initiate targeted improvements. They do not merely observe from a distance, but rather shape strategies and processes in collaboration with company management.
This active approach enables companies to be further developed operationally – for example, through:
- the expansion of platforms
- the optimization of processes along the entire value chain
- various sustainability initiatives
This direct involvement is one of the key distinguishing features of Private Markets and explains why many companies can grow more effectively over the long term than they would on the stock market.
Opportunities & risks – explained in simple terms
Opportunity for value appreciation
Active business development can generate additional returns over the years.
Lower market volatility
Private markets broaden the investment universe and can make portfolios more stable, as they are less susceptible to the fluctuations of public markets.
Broad Diversification
Different asset classes, such as Private Equity, Private Infrastructure, loans, and Royalties, offer varying return and risk profiles.
Long-term commitment
Private Markets are geared toward the long term. Units often cannot be sold or redeemed at any time.
Market and economic risks
Economic fluctuations, interest rates, or geopolitical events can have a negative impact on projects and companies.
Possible capital loss
With Private Markets investments, there is a risk of losing the entire amount of capital invested.
FAQs – Private Markets explained simply
Public markets are listed on stock exchanges and traded daily. Private Markets consist of companies and assets that are not traded on stock exchanges. As a result, they are less visible to the general public. Companies in Private Markets are not required to publish daily prices and can plan for the long term.
In Private Markets, investors can also directly influence companies – for example, through strategic measures or operational improvements. This is hardly possible in public markets, because investors there usually hold only very small minority stakes.
Private Markets are primarily suitable for investors who:
- want to invest for the long term
- wish to add Private Markets to their portfolio
- want to invest their capital over several years and value a globally diversified and professionally managed solution
Private Markets complement a portfolio because they offer access to companies and projects that are not available on the stock market at all. This means: Investors gain additional sources of returns and risk that behave differently from stocks or bonds.
That depends on risk tolerance, liquidity needs, and investment horizon. Private Markets are particularly suitable for long-term investors. The allocation should constitute only a portion, not the entire investment.
Private Markets investments are fundamentally long-term in nature. Investors should have an investment horizon of several years. Private Markets investments require time to reach their full potential, as companies and projects are built up and developed over the long term.
Risks include:
- Total risk: There is a possibility of total loss of the invested capital if companies or projects do not develop as expected.
- Limited availability (illiquidity): Private Markets are long-term investments that cannot be sold at any time. Redemptions are often only possible at specific times or not at all.
- Uncertain valuations: Companies are not traded daily on the stock exchange, so valuations are often based on models and assumptions – which may differ from actual performance.
- Market and economic risks: Economic changes, interest rate movements, or geopolitical events can negatively impact projects and companies.
- Currency risks: If projects are denominated in foreign currencies, exchange rate fluctuations can affect returns.
- Extraordinary events: Pandemics, wars, or natural disasters can have a major impact on private companies.
Generally, investors can invest in Private Markets by participating through specialized funds, asset management firms, or professional investment solutions.
Erste Private Banking offers direct access to Private Markets with a minimum investment of 20,000 euros. In private banking, investors receive tailored advice that incorporates Private Markets as a component of their overall strategy. Further information is available on the website.
Disclaimer
This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.
The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to Art 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to Art 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site www.erste-am.com within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the fund prospectus or the Information for Investors pursuant to Art 21 AIFMG and the Key Information Document are available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.
The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.
Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to Art 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.
Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.