Tapping Private Markets for Sustainable Prosperity
As the world’s economy and demographics shift, the appetite for diverse investment opportunities is steadily increasing. Nowhere is this trend more evident than in the rising demand for private investments that create sustainable prosperity.
A fusion of old and new concepts, sustainable prosperity today is the product of entrepreneur-driven technologies and business innovations that tie economic growth to quality-of-life improvements for a significant portion of a country’s population.
Over time, this trend typically brings improved education levels, healthcare, individual autonomy and government accountability. But it isn’t
an overnight fix: Implicit in the concept of sustainability is the recognition that prosperity must be achieved in a manner the global ecosystem can handle — over the long term, with benefits accruing at a faster clip.
What’s behind the growth of private investments
For those seeking investments that both foster sustainable prosperity and yield competitive returns, private market investing offers attractive growth opportunities. While public market performance was strong in 2019, many investors are mindful of the need to plan for potentially lower returns and a market downturn in the future. Adding private investments to a portfolio can increase diversification and potentially provide a measure of downside protection in volatile periods.
Private investments generally require more patience, longer time horizons and a greater willingness to forgo liquidity than their public-market counterparts. Often fueled
by demographic, economic and technology megatrends, investment opportunities that enable sustainable prosperity can be found across the globe, with the greatest concentrations in six technology-grounded sectors: sustainability and energy access, healthcare, education, food and agriculture, financial technology and community development and housing.
A final thought
The private markets model is straightforward: Invest in a business and grow it over several years, with the ultimate aim of selling it at a profit or taking it public. Today, the benefits
of private investments are well established and deserve the attention of investors — particularly those with patience, vision and a desire to create sustainable prosperity.
MAPPING THE OPPORTUNITIES
The promise of these opportunities typically ties directly to the maturity of the private investment markets in each area of the world.
In the U.S., the private markets are deep and mature with an increasing focus on developing technology that may help
create sustainable prosperity. Tech-enabled companies in healthcare, education and compliance are leading the sustainable prosperity charge in the U.S. These companies often utilize artificial intelligence and machine learning to better diagnose and heal patients, educate students and ensure that companies and workers remain compliant in a world where ethical behavior can make or break the fortunes of a company.
Today, early-stage venture-backed companies are staying private longer. Entrepreneurs are turning to private investors as a source of patient capital that allows them to fully develop their technology and ensure product-market fit prior to facing the pressure of quarterly earnings in the public markets. Although the next generation of breakout companies is difficult to identify, companies such as Veeva, Beyond Meat and DocuSign have already achieved large valuations in the public markets, while formative companies like Zipline, Gusto and Better Place Forests are on the horizon. Across both public and private markets, emerging companies and the major technology giants are being held to higher environmental and social standards, creating opportunities that can meet sustainability requirements for certain investors.
Despite — or perhaps because of — anemic economic growth and governmental morass across the continent, private equity-backed companies in Europe are growing faster than their public counterparts. Among these private equity-backed companies, a growing cohort is developing technologies targeting sustainability for enterprises and consumers alike, as a renewed focus on environmental sustainability has taken hold.
European investors are in the forefront of integrating sustainability practices into common business practices, with the Council of the European Union adopting two legislative reforms related to sustainable finance. These include the Low Carbon Benchmark Regulation, which will empower the European Commission to set minimum standards for two new carbon benchmarks. In addition, the Disclosure Regulation will govern Environmental, Social and Governance (ESG) disclosure requirements for financial market participants and advisers and how those firms integrate ESG factors into their investment decisions.1
With this backdrop of legislative reform and public desire to become more sustainable, technology is being developed across Europe to find more environmentally friendly solutions. This spans a wide range of applications, from refrigerator efficiency of supermarkets, to recyclable disposable consumer goods, such as plastic bags, cups and utensils.
Widespread mobile penetration, an entrepreneurial culture and a large pool of engineering talent are fueling the creation of world-class venture-backed companies. Encouraged by a large and growing consumer base hungry for technological innovation, some of the largest companies in the world have emerged from the China venture capital asset class.
Following its $25 billion U.S. IPO in 2014, Alibaba became one of the most valuable technology companies in the world and has since emerged as the world’s biggest online commerce business; hundreds of millions of users and millions of merchants and businesses are on its platform today.2 Other innovative technology companies coming out of China include Meituan, an e-commerce provider that develops and operates a platform for food delivery, consumer products and retail; Pinduoduo, an e-commerce platform allowing groups and individuals to participate in group buying deals; and Toutiao, a news and content platform that uses machine learning to create tailored newsfeeds for each user.
Technological advancements, together with a more prosperous population, have led to Chinese ventures outperforming all other private investment asset classes over the past decade.3
Technology is leapfrogging bureaucracy as cheap mobile data usage plans provide new solutions for payment processing and finance. In 2018, India’s digital economy totaled approximately $413 billion and is projected to grow to $1 trillion by 2025.4 This growth is powered by a large and growing population, rising levels of wealth and the decreasing cost of mobile data. In 2018, the cost of mobile data in India was $0.26 per gigabyte (compared to the $8.53 global average and $12.37 in the U.S.).5 Coupled with an incredibly low (34 percent) internet penetration rate and a young population, e-commerce and technology are poised to disrupt the country. This disruption has already begun as microfinance companies are beginning to use phone payments to build credit histories for consumers and provide small loans to individuals and small and medium-sized companies. As their wealth increases, these borrowers are poised to consume additional banking and investment products and services.
Throughout Africa, private investing is providing capital in the absence of well-developed public markets. With technology driving down the cost curves of wind and solar energy, investments in renewable energy have increased across the continent. Private investments have also participated in the agriculture sector as investors seek to professionalize the continent amid the world’s growing food crisis.
Like China and India, many countries in Africa boast some of the world’s highest rates of demographic and economic growth. This has greatly benefited companies like Jumia, Africa’s e-commerce platform, which launched its IPO on the New York Stock Exchange in 2019.6
3. Private iQ, The Burgess Group LLC, performance of global private investment asset classes, 10/1/2009 through 9/30/2019.