We explore the growing convergence between public and private markets and what it means for today’s investors. As private market strategies become more accessible, advisors and their clients are gaining new tools to diversify portfolios and pursue long-term growth. We break down what’s driving this shift, the opportunities and risks involved, and how financial professionals can help investors navigate this evolving landscape.
Nicholas VanDerSchie: Private markets are booming, and the numbers prove it. According to Apollo, nearly 90% of U.S. businesses generating over $100 million in revenue are privately held. More capital is flowing into these markets. Companies are staying private longer and new fund structures are making private investments more accessible than ever. While private equity and venture capital were historically only accessible to large institutions and high net worth investors that seems to be changing. In fact, options are emerging for individual investors and for financial advisors looking to allocate on their behalf. But with opportunity also comes complexity.
How should advisors think about integrating private investments into client portfolios? What are the real benefits, and do they outweigh the risks of limited liquidity and transparency? This is where Morningstar comes in. As a company built on bringing clarity to opaque investment vehicles, Morningstar is working to shine a light on private investments, helping advisors and investors better understand the risks, opportunities and evolving landscape. We'll unpack the key trends shaping private markets, the role of technology in breaking down barriers, and where this space is headed, including a word of caution from Morningstar's CEO.
Welcome to Simple, but Not Easy, a podcast from Morningstar's Wealth Group, where we turn complicated financial developments into actionable ideas. I'm Nick VanDerSchie, head of strategy and execution for Morningstar Wealth, and I'm delighted to be joined by a special guest, Joanna McGinley, Executive Vice President of Strategic Partnerships and Initiatives at PitchBook, a Morningstar company, providing data and intelligence to private market investors.
Before we get into the conversation, if you'd like to know more about how we support advisors, we welcome you to email us at simple@morningstar.com or me directly at nicholas.vanderschie@morningstar.com.
Now, let's get started. Joanna, welcome to Simple, but Not Easy.
Joanna McGinley: Thanks, Nick. It is really great to be joining you here, so thanks a lot for having me.
VanDerSchie: So, like many of the Morningstar guests that we have on this show, you also seem to have a long tenure here at the company. Can you tell us about some of the hats you've worn over the years?
McGinley: Yeah, well, you know, first I'll start by saying my tenure is long enough at Morningstar that I no longer provide specific years. You know, it dawned on me when I was meeting with some, earlier in career colleagues that when I shared my start year, I could sort of see the wheels turning and them doing the math, so I don't date myself anymore. But over time, I have had a variety of customer-facing roles to start over the years, and those were really amazing. It is really a dream to find solutions for customers and see them implemented. I then moved over to the building the solution side of the house and spent a number of years working on products. And I think having spent enough years with our customers was a great benefit for me in those product roles. And, one of the great things about Morningstar, as you know, is that there is no shortage of opportunity, and I really jumped at the chance to move over to the PitchBook team.
VanDerSchie: You're right about that. There certainly is no shortage of opportunity here. Joanna, in the show intro, I mentioned your title and your role within PitchBook, but it would be great to get a little more detail there. And to start, you know, maybe in two parts. One, can you tell us a bit about PitchBook, its history with Morningstar and kind of what it does, and then also share more about your role and what that entails?
McGinley: Yeah, absolutely. I love talking about PitchBook. PitchBook was founded in 2007 by John Gabbert with the objective of responding to a need in the market for a private equity database that really, up until then, had not been readily available. The first few years really represented sort of a bootstrapping financing stage for PitchBook, which probably sounds pretty familiar to those of you who are familiar with Morningstar's founding story, right? And actually, Morningstar was the first and only corporate or strategic investor in PitchBook. Morningstar invested initially in 2009, so shortly after PitchBook's founding. Over the years, PitchBook went on to add venture capital coverage, M&A coverage, funds data. We invested in global expansion. And really following Morningstar's full acquisition of PitchBook, which was in December of 2016, one of the first things we did is really quickly enhanced Morningstar's public equity data and research for inclusion in the platform. And that really helped to inform the valuation process through comparables.
In 2022, Morningstar and PitchBook acquired a company called Leverage Commentary and Data, or LCD. We acquired LCD from S&P. LCD covers the broadly syndicated loan market, and we've since really extended our coverage to include private credit and direct lending, building on top of broadly syndicated loans. And just a couple of weeks ago, actually, we announced another acquisition of Lumonic, which is a relatively new player in the private credit portfolio monitoring space. So all in today, PitchBook covers really the entirety of the private capital market ecosystem with private and public company and credit data, research in the form of asset class reports, emerging market research, daily newsletters, market alerts. We have tools including our flagship platform for research and to source investments and track funds.
We have IP, for example, we have 172 benchmarks by region, by strategy, by fund vintage year that allow full transparency into the funds that comprise each. And we have things like the VC exit predictor that uses our data to indicate the likelihood of a company's exit by merger, by IPO. And now we have workflow solutions like portfolio monitoring. Now, where I fit in, how I keep myself busy. I handle our strategic partnerships. So I work alongside our head of institutional research and market insights, and together we look at trends in the market and how we can address those through partnerships. And in January of this year, I took on a big new role across all Morningstar business units, including PitchBook, to organize around public private convergence.
VanDerSchie: That sounds like you are keeping yourself busy. Congratulations on the new role, Joanna, and certainly also congratulations on the acquisition of Lumonic. So I think an interesting place to start might be to frame the size of private markets compared to public markets for our listeners. And I've heard this analogy that if public markets are the size of Lake Michigan, private markets are closer to the size of the Pacific Ocean. Is that accurate? And can you help us quantify the market size here?
McGinley: Yeah, I can point to our great PitchBook data to do that. There's about 15 trillion in private market AUM in drawdown funds globally. And, just to provide some context, this has grown from about 1 trillion in 2000. So while still relatively small in terms of assets compared to the public market, the growth has really been significant and at a much faster clip. And it really highlights that there's still quite a bit of runway to catch up to public market AUM. In the U.S., now thinking about companies, in the U.S. public company AUM sits at about 62 trillion. Private companies in the U.S. are around 3.5 trillion. So quite a bit of room to pick up there. But if you look at it from a pure number of companies perspective, at the end of 2024, call it, there were around 4,400 U.S. companies. In contrast, there were around 12,000 PE backed companies and 59,000 VC backed companies in the U.S. at that same time period. So private backed companies are 94% of the share of public and private companies. So I think that really goes to your analogy from an absolute numbers perspective. There's a ton of opportunity across private companies.
VanDerSchie: Yeah, very eye-opening. It feels like you can't pick up a paper these days without seeing all the activity happening in the private markets. I keep reading about more capital flowing in, more firms staying private longer, and fewer companies going public. What are behind these shifts?
McGinley: Yeah, well, so I mean, first of all, I think you've nailed it in your comments here. If we look back over the last decade, we ran our PitchBook private capital indexes against public market indexes. And the headline story is that private markets have outperformed public markets, meaningfully, in both equity and in credit. Now, I'll caveat that, this has not been the case in the last, call it, couple of years, given that a shifting economic environment with higher rates has put a bit of a damper on liquidity. The IPO market has dried up some and M&A activity has slowed considerably, but over the longer term, private markets have outperformed. So what does that mean? This in turn drove greater investment into private markets.
So institutional investors, think your pensions, endowments, foundations were interested in a sustained opportunity to invest in private markets and really increase their allocations to private markets to take advantage of that performance bump. So this in turn increased the flow of capital that was pointed towards these private companies, which allowed them to really reach the scale of public companies without actually going public. So they're also issuing more debt outside of traditional bank lending in the form of private credit. So again, allowing them to stay private longer. You know, by point of example, there are more middle market companies with greater than 100 million in revenue that are private than are public today. So what does that mean? More new firms really rushed in to capitalize the market. So to give you a sense for that growth, there were about 2,000 active VC investors in 2010. That is now up to 13,500 active VC investors at the end of 2024.
VanDerSchie: You mentioned VC and I think for many when they think about private markets, they default to venture capital. Investing in a startup when it's young and then exiting when it goes public. But as you're alluding to, Joanna, private markets are much bigger than just venture capital. Can you maybe unpack that a little for U.S.? What are some of the other key sectors inside private markets that our listeners might be interested in learning about?
McGinley: Yeah, sure. You know, you're right. The unicorns get a lot of attention. The unicorns are the VC backed companies. We actually have a unicorn index series that tracks these companies and people are probably most familiar with the names here. That's OpenAI, SpaceX, Stripe. Now in that unicorn index, there are fewer than 1,500 companies. So not a ton. Taking a step back, and looking at the pitch book database, we have close to 4.5 million non-backed companies in our database. And that number is growing every day. There are 170,000 VC backed companies globally. And these companies fall into really interesting verticals. You think like AI and machine learning, climate tech, health tech, eSports and gaming. So those really interesting new verticals and U.S. venture capital AUM sits at over 1.25 trillion, according to our latest figures. Now to put that into perspective, private equity is actually much bigger. So that's ringing in at about 3.5 trillion in the U.S. So close to triple the assets. And we're tracking just north of 56,000 PE backed companies. And many of these companies are more mature companies. They're generating revenue and they're in more traditional industries.
So, you know, there are a lot of middle market HVAC companies out there that don't sound quite as exciting as those unicorn names as those VC verticals. But they're nonetheless attracting a lot of dollars. Another sector, private debt or credit. That's another asset class that doesn't sound as glamorous as the unicorns, but one that is also growing really quickly with close to 1.2 trillion assets under management in the U.S. And, you know, more companies are looking to private credit over bank lending for their debt needs. So that asset class will continue to grow. There are aspects of private credit that could start to follow in the VC glamour footsteps. So, in PitchBook's recent credit pitch newsletter, we reported on the potential for the NCAA to lean on private credit, especially pending some changes to athlete compensation and some of their…
VanDerSchie: Very timely.
McGinley: Yeah, financial needs. So for all of you March Madness fans, keep your eyes on private credit trends. And I think lastly, there's real estate infrastructure and real assets. Those also have meaningful assets that collectively also eclipse venture capital.
VanDerSchie: Okay, great. So, it's clear based on all that that the landscape is absolutely evolving. But I want to shift our conversation to accessibility. As you know, private markets were historically a playground for large institutions, pensions, ultra-high net worth investors. But it seems like that's clearly starting to change. And I guess maybe Joanna, could you talk a little bit about what you see driving that shift in accessibility?
McGinley: Yeah, we talked earlier about the increase in capital to private companies and the resulting increase in venture capital and private equity investors. So these investors in turn need capital to fund continued investment. And while institutional investors, those you reference, the pensions, the endowments, foundations, financial firms, may have increased allocations to private markets over time, their growth is capped, and the real opportunity is to extend distribution to more of the wealth and retail market. There's an estimated 450 trillion in wealth assets, and if private markets are able to capture even a small percent of that, it represents huge opportunity. And the GPs, the VC and PE firms, are positioning themselves to capitalize on it by making private markets more accessible to the wealth channel. And if you think about the differences in trends for pensions versus 401(k)s, that also represents another huge opportunity for growth.
VanDerSchie: Sure. Now, that makes sense. Let's talk a little bit about investment vehicles. And we've seen an ETF recently launched in the private credit space. We've also observed interval funds increasing in popularity. But beyond that, what other fund structures are gaining the most traction out there?
McGinley: Well, in the U.S., interval funds, non-listed BDCs, non-listed REITs, and tender offer funds have all seen a number of new launches in recent years. In fact, there have been more than 200 fund launches across those vehicles since the start of 2019, and a lot of those are targeting the wealth opportunity across those vehicle types. When you look at perpetual capital funds overall, they're becoming an increasingly important source of assets for the GPs. So large name brand GPs are emerging as the primary beneficiaries in creating distribution channels for wealth with these vehicles. So these established firms leverage their resources, their brand recognition, their names in the market to capture actually a significant portion of the market. So, looking at a few of the biggest GPs that you've probably heard of, perpetual capital accounts for 40% of Blackstone's AUM, 60% of Apollo's, 42% of KKR's, and over 75% of Blue Owl's.
So, investments in perpetual capital funds really can come from any part of the market. They can come from traditional LPs, but the wealth market is a big contributor here. And the wealth market has had, you know, historically limited access to drawdown funds. So, the ability to invest in these perpetual capital funds will likely result in a lot of new capital flowing into these vehicles in the coming decade. I think it's also worth mentioning that secondary offerings in traditional drawdown funds led by both GPs and LPs are also growing at a rapid pace. And that in part is also led by investments by the wealth channel.
VanDerSchie: So, Joanna, it does feel like both technology and product innovation have played a huge role in breaking down some of the legacy barriers that existed in the private market space. What are some of the key advancements that have made private markets more approachable in your view?
McGinley: Well, high investment minimums and low accessibility have historically meant that private fund investors are those with large pools of capital. So again, our institutional investors, as GPs have adopted more effective processes and better technologies, they're able to scale and accommodate a much larger investor base. These GPs also recognize the benefit of these perpetual capital fund structures in smoothing out what has previously been a really lumpy and sporadic fundraising process. So these new vehicles offer liquidity by virtue of their structure and some by virtue of holding a combination of public and private securities. And there's also a push to bring more transparency to these products to ensure that better advisor education is available and accompanies their go to market strategies. And a lot of GPs have their own platforms to facilitate trading and then platforms like iCapital in case help provide access for other managers. So actual accessibility has improved. But I think, you know, caution their operational processes and execution may still be challenging and it's still early days.
VanDerSchie: Fair enough. So I know a lot of investors and advisors might be wondering since public markets offer daily liquidity, transparency, diversification, why bother to introduce private investments at all? So Joanna, can you speak to some of the key benefits of incorporating private investments into a client's portfolio and frankly, do they outweigh these costs?
McGinley: You know, at the end of the day, investors are looking for better performance, better portfolio diversification and the relatively uncorrelated nature of private market assets is attractive for those reasons. The potential for better returns is top of the list. But the costs and the trade-offs really are still to be determined. Fee structures really need to be closely reviewed. Things like what do performance fees and management fees look like. Redemption schedules should be clear. Investors need to know the constraints on redemptions. Subscriptions and distribution terms should be reviewed. Accredited investor or qualified investor requirements still exist for some of these vehicles. And you know, since growth in these perpetual capital vehicles is recent, looking at a track record is not always possible for all of them. So the type of research and manager selection advisors might be accustomed to doing is really not quite as easy to do. There aren't yet great benchmarks out there.
Looking to the existing drawdown fund benchmarks, those PitchBook benchmarks, I mentioned it's not an apples to apples comparison. You know, drawdown funds typically look at internal rates of return and they're not comparable to evergreen fund time-weighted return measures. So, it's really hard to benchmark. Are you getting the return for these costs and risks?
VanDerSchie: All right, Joanna. So, I think many of our advisor listeners who are listening to this podcast are probably wrestling with the idea of potentially allocating toward private markets. But I think for them, the next big question is going to be, how do we actually go about implementing this? And so, in your view, what types of investments are becoming most available and accessible through that wealth channel that you mentioned?
McGinley: You know, private credit factors into interval funds and non-listed BDCs really heavily. So think things like BCRED, Blackstone's private credit fund, which is a non-listed BDC. I believe it's the largest private credit fund in the market. Cliffwater Corporate Lending is another big interval fund with a private credit strategy. State Street and Apollo have launched a private credit ETF, as you mentioned. Capital Group and KKR are launching a new fund with allocations to both public and private debt. So private credit is a big area. Non-listed REITs are obviously invested in real estate. Again, think of big funds like BREIT. You know, because these evergreen vehicles typically allow for some liquidity to redeem from the fund, this structure has historically been more appropriate for income-producing assets such as core real estate and debt. A GP can satisfy a limited amount of redemptions with the cash generated from these assets instead of being forced to sell something in what could be an unfavorable market condition.
VanDerSchie: Okay, so once advisors have identified the investments that make the most sense, purely from a portfolio construction standpoint, how should they think about the right allocation to private markets? Is there a general rule of thumb or like anything else? Does it depend on a lot of other variables specific to the investor?
McGinley: There's probably both. I'll speak a little bit more to the latter. Wherever an investor is on the wealth spectrum, you know, those investors and their advisors have to balance short-term liquidity needs and long-term wealth goals. You know, when you incorporate private capital into their portfolios, individual investors with a long horizon, with appropriate risk tolerance, they can allocate a portion of their assets to capitalize on those diversification benefits and the potential for more outsized returns and then leave the rest of their portfolio and more traditional stocks and bonds. You know, size matters when determining the appropriate asset allocation where an individual is on the wealth spectrum. You know, those on the higher end can afford to behave maybe more similarly to institutional investors. As a point of reference, defined benefit plans with greater than 100 billion in assets under management allocate about 17% to private capital and for endowments that allocation is closer to 30%.
You know, best practices more generally include diversification across investment years, asset classes and managers, which, and that historically has been really hard to achieve and really resource intensive when using drawdown funds. So these new perpetual capital funds are shifting this narrative by lowering that barrier to entry. And ultimately, the right mix is going to depend on, again, investor type, their wealth level, their liquidity needs, their risk tolerances, their goals, really not too different from what advisors likely are already factoring into their general portfolio recommendations.
VanDerSchie: Yeah, that makes good sense, Joanna. So for advisors who are new to this space in terms of getting started and kind of educating their base of clients, how do they move forward?
McGinley: First and foremost, you know, the cost and the risks that we discussed really need to be highlighted to investors. Investors need to understand the liquidity constraints and their risks. They need to understand the redemption schedules when they can get access to their dollars back. They need to understand the fees they're going to be paying for these vehicles, which are typically higher than what they're paying in the public markets. But these are all the same factors they need to look at when they are doing their reviews in the public fund space. They need to understand their tax implications. They need to get a grasp on how the addition of alternatives to a portfolio is going to impact their risk and return profile. And I think one of the great opportunities for Morningstar is really to continue to push for more transparency and to make this data available to advisors to support these efforts.
VanDerSchie: Absolutely, great advice. So the last kind of topic I want to talk about is really just the future outlook here. And, you know, as we look a few years out, it really does feel like we're at the beginning of a massive shift in how advisors and investors access the private markets. And, in fact, our CEO Kunal Kapoor recently told Barrons that while there's a lot of interest in private markets, investors should proceed with caution, warning that, "a lot of junk will be sold in the space". Joanna, with that in mind, how should advisors help their clients manage that balancing act?
McGinley: Well, Kunal is not one to sugarcoat things. Advisors need to have run their own diligence on these investments and have a perspective on the overall portfolio view for their clients. Again, highlighting the differences that investors really might not know to look at or ask about it. And really, it's the same thing that they have done for open-end funds for many decades.
VanDerSchie: So, do you see a future where private and public market investing are equally accessible to all investors? And, you know, what would need to happen to make that a reality?
McGinley: That's really hard to answer. It's the million-dollar question. But early indicators seem to imply that the private market landscape is looking a lot like the early days of public fund adoption. And their transparency was really a key starting point for this evolution. So that's what we're going to push for.
VanDerSchie: Fair enough. Before we wrap, Joanna, and you touched on this a little bit a few minutes ago, but for advisors who want to start integrating private investments into their client portfolios, what's the best first step? And how can Morningstar help?
McGinley: Well, we've talked a bit about education and what we need to educate investors on, and that's a great place to start. Morningstar has published some great content over the last few months that really gets to the heart of the issues, both generally, as well as funds specifically. And we have a lot on the horizon, including full coverage of interval funds, BDCs, REITs, and tender offer funds in the coming months, enhancements to our asset allocation and portfolio construction tools to help bring more transparency to how to incorporate alternatives in a portfolio and how that impacts risk and return. We also, down the road, expect to rate and publish research on interval funds, hopefully by the end of the year, to aid in advisors making the right selections for their clients and are really looking at how to transform some of our data for benchmarking purposes. Again, there's a lack of a good benchmark for these new perpetual capital funds.
And our goal is really to follow the same road map as we did for public market funds, starting with the data, building analytics, research and tools from there, and then really making it easy to look at public and private markets in a standardized view together and equipping advisors with the tools and research they need to start integrating private investments into their client portfolios.
VanDerSchie: And there you have it. Another episode of Simple, but Not Easy. As always, we thank our guest, Joanna McGinley, for her time and engagement. And once again, if you'd like to know more about how Morningstar can support you, please drop us a note at simple@morningstar.com or me directly at nicholas.vanderschie@morningstar.com. That wraps up this month's episode. Before we depart, if you enjoy hearing the insights on our podcast, please consider leaving a five star review on Apple Podcasts or Spotify. Until next time, thanks for listening.
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