Is There Geographic Bias in Macro Liquidity Trends in Private Markets?

Building on our previous analysis of the role of geographies in the variance between public vs. private market performance, we now take a look at both contribution and distribution rates.

While contribution rates are a proxy for investment interest, adding distribution rates to the mix can better explain how fund payoffs may affect investment levels. As illustrated in the following chart, we examined the three biggest geographies—North America, Western Europe, and Emerging Asia—to explore whether trends emerge geographically or whether investor interest is region agnostic.

Key Takeaways

We see clear periods of high relative distributions and high relative contributions. Contribution-heavy periods are more common, which makes sense given the private space is expansionary and distributions from outperformance and underperformance of funds are partially offsetting factors. Distribution-heavy periods tend to begin about three years after a recession, likely due to deep value investments in that period paying off high multiples.

Analyzing how the geographies switch between distribution and contribution regimes, there is inconsistent smoothness. European investments seem to swap between contribution and payoff periods with little transition, while American and (more recently) Asian investments gradually transition between the two as we see in two periods: 2010 – 2011 and 2018 – 2019.

That seems to indicate those markets are less macro influenced with investing interest being relatively constant. The long period of distribution-heavy years in the 2010s is likely derived from the easy money run of the post-2008 economy.

Leading and lagging is the last factor we observe in this data: European and American investments transition more quickly than Asian investment levels for most of the timeline (2001-2018).

However, since 2018 there has been a decoupling as interest in American and European investments seems to be deepening compared to the payoffs of those regions. The Asian markets appear to be trending toward a payoff period, similar to the deep value investments in the 2020s payoff. The other markets seem to have experienced a payoff period in 2021 as markets rebounded.

Looking Ahead

Expanding on the previous point, Asian markets (largely driven by China) appear to be heading toward net positive distributions as funds from 2020 pay off. From here, continued economic strength could lead the region to experience more distributions above contributions, though that scenario will likely revert over time as returns normalize and contributions continue to rise.

On the other hand, European and American investment contributions are rising compared to distributions, potentially signaling a falloff in returns from private investment. That could slow additional investment. Alternatively, it could just be steadily increasing contributions with flat returns leading to a deepening contribution deficit.

Private Equity Performance: Large Strategies Versus Funds of Funds, Co-Investments, and Secondaries

In private equity, the large strategies of buyouts, venture capital, credit, and real estate naturally grab the headlines as the biggest players in the industry. But there is an important subset of strategies to explore: the fund of funds, co-investments, and secondaries that raise private capital to invest in the big fund strategies.

As those strategies make up a smaller percentage of the industry and our dataset, we’ve analyzed whether their returns mirror those of the total industry. We grouped them by geography and calculated respective IRRs.

Key Takeaways

The performance of this subset mirrors the performance of the overall market almost exactly, with a 12.6% IRR across private equity in our dataset and 12.5% for the subset. In addition to performing roughly in line with the market, the subset offers diversification opportunities to investors.

The geographies themselves also align with what we see more broadly, with North America, Western Europe and global markets performing the best. North America particularly stands out with an IRR of 15.6%. The robust alternatives market in North America creates ample opportunities for fund of funds, co-investments, and secondaries, all of which could continue to attract more investment in the future.

The emerging markets regions (including Asia – Emerging) lag the broader market, averaging 7.7% IRR across the three strategies compared to 9.41% across all private equity strategies. The disparity suggests that more nascent PE environments (as opposed to developed markets) produce less fruitful returns on fund of funds, co-investments, and secondaries.

Looking Ahead

Regarding the last takeaway, consider monitoring whether the performance of these strategies strengthens as the market matures and aligns more with the performance of developed markets. This would likely be the result of a large shift in the subset markets and thus may take over a decade to see it bear out.

On a shorter horizon, the new administration and Congress in the United States may play a large factor in shaping alternatives, including the subset we’ve discussed. While we don’t have any solid policy to examine yet, the combination of potential foreign investment, tariffs, and changes to corporate tax structures could be a boon for alternatives, which would strengthen the returns for fund of funds, co-investments, and secondaries.

Examining Tariff Policy Impacts on Private Fund Contribution Rates

Recently we examined the impact of Latin America presidential elections—which carry presumptions about candidates’ economic policies—on private market performance. Now we turn to the U.S., where tariffs have remained a common refrain leading up to and after the 2024 presidential election.

Given the long history of tariff enactment, we analyzed the impacts to private fund contributions—specifically, total contributions as a percent of total commitments (but not yet funded) among investors.

• We selected the Asia-Emerging and Europe-Western geographies (both are targets of recent tariff policies) as comparison points with North America.
• The key dates to examine in this timespan are the initiation of tariffs the U.S. imposed on China in Q1 2018 and the end of the tariff conflict between the U.S. and EU in Q4 2021.

Key Takeaways

Looking at the pre-2018 window, there was a trend of overall upward growth in contribution rates across all geographies. That was likely due to private markets’ expansion in the wake of the 2008 financial crisis.

To say the rising tide lifted all geographies makes sense, even with volatility in Asia’s markets at the time, and is likely explained by its smaller sample and developing market historical returns.

From 2018 onward, there was remarkable consistency in contributions among investors across geographies. Europe and Asia displayed a consistent regime of 10% average contribution throughout the timeframe of our analysis. The U.S. hovered slightly above 10% before 2020 but experienced higher volatility in the wake of the pandemic.

That levelling off of contributions reads more as an equilibrium than a suppression due to policy. Given the noise in the chart, it could be argued that any spikes from a change in policy in Q4 2021 European investment per se were clearly not sustained.

Asia similarly does not display much change in private market investment interest throughout the tariff policies since 2018.

Looking Ahead

The U.S. has used tariffs is various forms to achieve its economic objectives for decades, and it appears there is continued support of a tariff policy from the next administration.

Regarding the implications for private market investor contributions, it may be difficult to extrapolate an immediate impact. Given the long investment time horizon, private markets are insulated from temporary policy. But time will tell if any longer-term trends may emerge to change investor sentiment.

Comparing Public and Private Market Performance: Does Geography Matter?

We’ve often analyzed various index returns in the public and private spheres over the years. For today’s analysis, we have augmented our approach to visualize the role of geographies in the variance between public and private market performance.

Given the robust data available, we selected Asia-Emerging, Emerging Markets, Europe-West, Latin America, and North America from the MSCI regional indexes on our platform. The analysis timeframe starts in 2007 so that you can also see the variance of returns after the Great Financial Crisis. Overall, there are several trends to examine.

Key Takeaways

All markets have ultimately trended toward the 0% variance line because of the cumulative effect of the performance numbers over time. The high variance in early years of our 2007 – 2024 sample period reflects a fair amount of noise in the data. However, as the data in our analysis reflects total returns over time, the equilibrium values in the later years are more accurate compared to the initial chart noise.

For 2024:

• The positive indexes are Latin America and Emerging Markets with a delta of around 3% and 4%, respectively. That indicates a higher return for the public market compared to the private market. This is likely due to a high loss ratio, and low internal rates of return among those private markets during our sample time period, buoying otherwise normal public market values.
• The negative index is Europe-West with a delta of around -7%, indicating a higher private than public market return. This is likely due to the stagnant public market returns of the region in the past 10 years combined with above average private market returns—especially a significant group that generated returns above 15%.
• The near-zero indexes are Asia-Emerging and North America with a delta of around -2%, indicating a slightly higher private than public market return. In both cases this is driven by high public and private market returns, with the disparity between the two likely driven from the illiquidity premium that private investment offers.

Looking Ahead

While this dataset covers total returns and therefore is not predictive of future public/private disparity in performance, it does show some overall trends on which geographies have tended to outperform in their public vs. private spheres.

Many of these trends are locked in: 4 of the 5 have always been positive or negative, with one, Asia-Emerging, having flipped between the two. It’s an interesting trend to follow as investment in private funds in China has likely overtaken public investment as the country’s public rate of return has slowed to other developed-market economy levels.

Furthermore, other select emerging markets may see a similar reversal, with their private markets beginning to outperform the public ones as their economies also stabilize and more robust pathways of private investment appear.

Changing Fortunes: Tracking 20 Years of Returns Across Credit and Venture Capital 

Last month, the Federal Reserve announced its first cut to interest rates in over four years. This is expected to be followed by more cuts into early next year, reversing the trend of increasing rates throughout the 2020s.  

With this in mind, we analyzed the returns of credit investments in our dataset and noted how it tracks through different policy adjustments and environments. For the analysis, we pulled the Credit Time Weighted Rate of Return (TWRR) and included the same metric for venture capital. VC offers a good counterpoint to credit, as they have different risk profiles that would be expected to behave different under various macro stressors such as inflation and high-growth environments, for example. 

Key Takeaways

As anticipated, VC and credit offer many different quarters and periods of divergence over the past 20 years. This is a helpful pairing to highlight how different environments effect credit.   

Conversely, credit much more closely follows a strategy like buyouts. In fact, over the 20-year sample period, credit and buyout returns were within 1% of each other for 23 quarters, or 28% of the time. This level of similarity created a pattern where the dips and recoveries very closely mirrored themselves across different macro environments. 

The last two recessions best illustrate how the macro climate can shape performance among these strategies in different ways. Coming out of the global financial crisis, credit experienced four quarters of outsized returns, benefiting from undervalued distressed assets. Meanwhile, venture rebounded as well, but more mildly, as the recovery from the crisis was less conducive to startups and tech. 

The roles were reversed at the start of the 2020s, as VC experienced sharp recovery from the COVID bottom-out. Fueled by cheap money in a low-rate environment, VC had seven quarters of market-beating returns, but has been mired in two years of underperformance as inflation and a tightening economy took control.  

Conversely, credit didn’t experience the peak performance through the end of 2020, but it has steadily produced returns in recovery and outperformed VC since Q1 2022, with a more beneficial high-rate environment and less of an impact from large-scale events like the bank failures of 2023. 

Looking Ahead

Outside of a roughly five-year window at the end of the 2000s, credit has been the more consistent strategy quarter-over-quarter dating back to 1995 when our dataset starts. With this track record, we expect that trend to continue holding through the rest of the 2020s. 

This may hold true even as rates are cut, which historically has been a boon for VC returns. If this leads to outsized returns a few quarters down the road for the strategy, we still expect the quarterly consistency to remain on credit’s performance.

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Measuring Momentary Impacts of Latin America Presidential Elections on Public and Private Markets

Investors often look at the future economic policies of presidential candidates to forecast public versus private market elevation. Latin America has had many recent presidential elections that give us a quality sample size to analyze if a connection exists.  

The charts below represent a portfolio of Latin America fund performance. We display both value change and return to capture private markets and placed that against the overall public market return for the region to discern potential correlation to a public market effect. 

Key Takeaways

To establish the list of elections we looked at Brazil (Q4 2018, 2022), Mexico (Q3 2018, 2024), Argentina (Q4 2015, 2019, 2023), and Colombia (Q2 2018, 2022). As the four largest economies in Latin America, they comprise the majority of private investment interest within our dataset. 

Q4 2016 – Q1 2017 saw significant contributions, and Q1 2023 saw significant distributions. While a change in power did occur in Brazil in Q4 2016, it was mired in weak sentiment and was unlikely to have lifted investment interest. Q1 2023 also does not coincide with any election, and therefore may instead reflect the eventual distribution of funds invested in 2020 given how three years of the highly profitable deep-value investments of 2020 may have begun to pay off. 

Q3 2020 delivered a reversal of the private and public market returns as the private market return jumped from a negative to around 5%, while the public market returns dropped from around 8% to 3% over the same time period. This doesn’t seem to correlate with any of the election timelines. It could easily be a combination of public market drawdowns from pandemic shutdowns combined with large returns from a small group of funds floating the private market returns. 

Looking Ahead

Late July saw a heavily scrutinized election in Venezuela: A country that has historically had significant impact on oil pricing, but a smaller overall economy. This will likely have significant effects on local markets, but it’s too soon to evaluate if the election will impact investment interest at a regional level. Overall, however, our analysis within Cobalt’s market data set tells us it’s difficult to predict the impact of presidential results on public or private markets above the level of mere market noise.  

Going for Gold: Assessing the Strongest Investment Strategies In Western Europe

With the eyes of the world on Paris for the Olympic Games, we wanted to identify the top–performing strategies in France’s geographic profile, Western Europe, and award some medals of our own. To best assess the overall performance of each strategy, the top-line performance along with underperformance and downside, we review the quartile benchmarks for the seven main investment styles in the region. 

Key Takeaways

Among the seven strategies there are three standouts: buyout, venture capital, and growth equity. At first glance, growth equity is the top performer with the highest upper fence at 22% (or the percent at which any fund above it could be considered an outlier within the dataset). Venture capital (VC) would appear second, but it has a higher top-quartile cutoff at 23%. This, paired with a better lower fence (denoting less downside risk) means we would place VC slightly ahead of growth equity for the gold medal in Western Europe.  

Buyout funds lack the top-level performance of the other two but make up for it with a third quartile breakpoint of 6.4%, much higher than VC and growth. This positions buyouts as having a bit less upside, but steady returns for at least three-quarters of funds in the region make it a clear case for the bronze medal. 

The other strategies take the benchmark pattern of buyouts a step further. Although they have considerably less upside from the top-performing quartile, they have a higher floor with all lower fences for these strategies falling above -10%. The sturdiness of these investments and the smaller spread of likely outcomes provide slightly more certainty to these strategies compared to the top performers. 

Looking Ahead

Although venture capital has won the gold, the changing macro-environment may have an outsized effect on the private markets in the years to come.  

With economic indicators such as inflation and the CPI normalizing over 2024 after the rockier preceding years, there may be a rising tide that lifts all strategies to healthier returns in the back half of the 2020s. 

Tracking Private Market Investments in Natural Resources Through the Evolving Regulatory Environment

Recent months have seen temperatures rise between Exxon and large institutional LPs, namely CalPERS. The conversations are centered around board member votes and, more broadly, shareholder rights. While these factors don’t directly impact our Cobalt dataset, it’s a timely opportunity to analyze our LP base portfolio allocations to Natural Resource.  

For the analysis, we focus on the pace at which distributions are being made in that strategy across all geographies over the last 10 years. (distribution pace = distributions as a % of NAV). 

Key Takeaways

The most evident trend in the chart is the steady downward trajectory throughout the 2020s, from a high of 23.5% in 2014 to the low of 11.6% in 2019. This mirrors the trend in the public markets in that timeframe, with the S&P Global Natural Resource Index peaking over 2900 in 2014 compared to a high of only 2500 throughout 2019. This reinforces that Natural Resource saw decreasing fortunes through the decade, even as many other industries thrived. 

This trend continued to an even larger extent into 2020, with only 7.6% pacing throughout the year, the lowest since 2009. As COVID greatly impacted all markets earlier in that year, Natural Resources continued to struggle in the latter half as well with each individual quarter all returning < 2.5%.  

The span of 2021 – 2022 proved to be a strong bounce-back period, with 2022 returning a high of 32.8% in the timeframe. Although 2023 isn’t quite on pace to match that recent strong form, it should reach roughly 14% – 18% depending on the final Q4 numbers. That would fall in line with many of the average years of the 2010s.   

Looking Ahead

The Natural Resource Index saw 3.7% growth in Q4 2023, so while not a 1-to-1 comparison to the trends seen over the past decade, this is a sign we may see a healthy Q4 posted once numbers are finalized. The same index has also seen a strong 2024 thus far, so we should continue to see the 2020 dip in the above chart as an outlier in an otherwise strong recovery from the downturn throughout the 2010’s.  

The questions raised by this conflict will be interesting ones to monitor throughout the decade. The dynamic between LPs and large companies when it comes to investment horizons and ESG policies will continue to play out and have large impacts on these investments moving forward. 

Silicon Safari: Examining the Trajectory of Sub-Saharan Investment Trends

In May, the US hosted Kenya President William Ruto as part of a diplomatic effort with the Sub-Saharan Africa nation. Much of the focus was on the economic relationship and potential partnership for investing in areas such as technology startups in Kenya’s “Silicon Savannah” or sharing funding from the CHIPS Act.

Building upon our previous analysis of emerging market investment, in this article we’re investigating investment interest and returns so far in the region. The chart below shows the levels of contributions and distributions over the past 15 years, overlaid with a comparable index (MSCI Emerging Markets IMI) to show regional performance in the public markets.

Key Takeaways

While the relatively small size of the sub-Saharan private market means there will be lower volumes of cash flows to measure, we see a pattern of fairly low but consistent contributions from 2010 to 2020. After 2020, the contributions largely drop off except for a return to form in 2023. This is a result of a small sample size, largely concentrated in funds raised in the early to mid-2010s. When these funds were fully contributed by 2020, the contributions dropped off, with newer funds beginning to show up in 2023. Overall, it indicates a stable but low level of interest in investment.

On the other hand, the distributions tell a different story. As expected, the distributions slowly begin about three years after contributions had initiated. However, they proceeded to slowly build over the time period observed, ending at several multiples of the highest contribution levels. This and the choppy-but-consistent slow growth of the emerging market sector shows there are returns to be had—even with the small sample—and there may be room for increased investment.

Looking Ahead

In light of this news of greater investment into the region, investors will likely pay more attention to the Kenyan tech sector. And that interest could certainly spread into Ghana and Nigeria in West Africa, which have shown strong growth in population and tech capacity.

What remains to be seen is whether the sparse-but tangible returns the private sector has seen over the past 15 years are indicative of future capacity—or whether expanding the sample size will show a market no more remarkable than any other.