Private markets have transformed from a niche allocation into a mainstream investment strategy, and this shift is reshaping portfolios globally. Navigating this increasingly crowded space requires a sharp focus on value rather than cost, according to Duncan Lamont, head of strategic research at Schroders.
In an interview with Investment Officer, Lamont outlined the opportunities and challenges that investors face as private markets continue to grow, including the issue of dry powder and the rising role of Luxembourg as an international hub for private market vehicles.
Understanding illiquidity
For years, private markets were the preserve of institutional investors with deep pockets and long-term investment horizons. Now, thanks to the rise of semi-liquid vehicles and products like the European Long-Term Investment Funds (Eltifs), they are becoming more accessible. However, many investors still hesitate due to concerns over illiquidity.
People often overestimate their need for liquidity, said Lamont. “People get scared by their liquidity, but actually I feel that a lot of people have greater tolerance for taking on private assets than they perhaps realise at the outset.”
According to Lamont, long-term investors such as pension funds, or even individuals with extended time horizons, may have more capacity to take on illiquidity than they realise. This shift in mindset is essential, he argues, as public markets shrink.
“We should also not forget that lots of these assets are highly cash generative,” he added. “So yes, private equity has locked in your capital up for a long time. Private debt is throwing up very healthy income yields, to be honest. One of the main attractions of private debt is the ability to get more income than you can do in public markets, in infrastructure such as renewable energy, infrastructure, again, highly cash generative assets.”
With fewer companies choosing to list, particularly in Europe and the U.S., sticking exclusively to public equities risks cutting off access to a significant portion of future growth.
Dry powder: Overcrowded, but not everywhere
Despite the enthusiasm for private markets, the abundance of uninvested capital, or “dry powder,” has led to concerns of overcrowding, particularly in large cap buyouts. Record levels of fundraising in this space have sparked fears that excess capital is inflating valuations and compressing future returns.
However, Lamont emphasises that this problem is not uniform across private markets. “The dry powder issue is most prominent in large cap buyouts, but when you dig deeper, you find areas like small and mid-cap buyouts, early-stage venture capital, and asset-based finance that remain less crowded and still offer attractive opportunities.”
Schroders, Lamont explains, has deliberately focused on these under-the-radar areas. Smaller buyouts, in particular, offer operational improvements that larger companies—having been through multiple rounds of private equity ownership—can no longer provide. “The first private equity owner of a family-run business can often extract operational gains that larger companies cannot, and when it comes time to exit, you can often sell into the large cap buyout market, taking advantage of the excess capital there.”
Shift from cost to value
A major concern Lamont raised is the industry’s overemphasis on reducing fees, sometimes at the expense of quality. “There’s been too much focus on lowering costs, and not enough on the value being delivered,” he says. “Private markets have consistently outperformed public markets on a net-of-fee basis, but focusing solely on cost risks undercutting that value.”
For Lamont, private asset management is the epitome of active management. It involves far more than simply picking stocks. Venture capital managers, for example, may sit on the boards of start-ups, shaping strategy and growth. The hands-on nature of this involvement is why private market management comes with higher fees, but Lamont insists that the returns justify the cost.
“In private markets, it’s about delivering real value. Whether it’s improving the operations of a company or driving strategic growth, this requires far more involvement than managing a passive portfolio. Cutting fees to the bone risks undermining the ability to generate those returns.”
Luxembourg: Trusted hub for private markets
Luxembourg has emerged as a critical player in the global private market landscape, offering robust infrastructure and a stable regulatory framework. For Lamont, Luxembourg’s reputation as a reliable financial centre is key to its appeal.
“Luxembourg is a global leader when it comes to private market vehicles,” Lamont notes. “Its established track record, resilience, and ability to adapt to new structures makes it a trusted hub. It’s a ‘safe pair of hands’ that offers reassurance to investors entering the private markets space.”
Schroders, with its own extensive experience managing public investment vehicles, sees parallels between its approach and Luxembourg’s strengths. “We’ve been running investment trusts for decades, essentially managing private assets in public vehicles. This expertise, combined with Luxembourg’s operational strength, provides investors with the confidence that their investments are being managed with the highest standards.”
The future of private markets
Looking ahead, Lamont sees private markets continuing to grow as public market opportunities diminish. “The number of publicly listed companies has been declining for years, particularly in developed markets. As private capital continues to fund companies through later stages of growth, public markets will capture less of the corporate universe. Investors who focus solely on public markets will miss out on key opportunities.”
As demand for private assets grows, Lamont believes the industry must shift its strategy. “The mega-cap funds that have dominated private markets for the past decade may not deliver the same results going forward. Investors will need to explore more specialised areas, such as small and mid-cap buyouts, asset-based finance, and early-stage venture capital.”
Specialisation and value are key
The message from Lamont is clear: in an increasingly competitive private markets landscape, the focus must shift from cost to value. Investors willing to specialise in less crowded areas will be best positioned to reap the rewards of this evolving asset class.
As Luxembourg continues to strengthen its position as a hub for private market vehicles, and as investors become more comfortable with illiquidity, the future for private markets looks bright. Those who adapt to these new realities will be the ones who capture the best opportunities in the years to come.
Schroders embraces Luxembourg’s private ecosystem
Finbarr Browne, CEO of Schroder Investment Management (Europe) S.A, and Tim Boole, head of product management for private equity at Schroders, both emphasised Luxembourg’s continuing importance as a hub for alternative investment funds.
“We believe Luxembourg will continue to play an important role as a centre for alternative investment funds.,” Browne and Boole said in a follow-up via email. “It has the appropriate infrastructure to support investment managers in developing new funds plus it is a globally respected jurisdiction for investment funds.”
According to them, Luxembourg offers the right infrastructure for investment managers to create new funds, while also being a globally respected jurisdiction. They highlighted the comprehensive financial services ecosystem in Luxembourg, which includes service providers, advisory firms, and industry associations. Moreover, the legal framework there provides flexibility for both regulated and unregulated vehicles, enabling products to be tailored to client needs.
Browne and Boole also pointed out the strength and accessibility of the Luxembourg regulator, the CSSF, particularly for early engagement on new product ideas. Schroders has maintained an office in Luxembourg since 1995, with around 20 percent of the company’s assets under management domiciled there. Initially focused on cross-border Ucits, the firm has since expanded into private assets, including private equity, real estate, infrastructure equity, and infrastructure debt structures in Luxembourg.