In retrospect, WestJet Airlines went private at an opportune time. In 2019, before the coronavirus devastated the airline industry and roiled financial markets, the Calgary-based carrier was acquired by private equity firm Onex for CAD 50 billion, its shares delisted from the Toronto Stock Exchange.
Morningstar equity research wrote of the transaction, “We think private markets are a great landing spot for WestJet’s assets, since public markets are uneasy about commodity volatility, a stalling upcycle, and management’s operational transformation. The private market is able to weather these near-term headwinds and give WestJet space to execute.”
While the headwinds would only stiffen, WestJet’s flight path reflects a broader trend—one that is unlikely to reverse. A huge number of companies in recent years have chosen to go private or stay private thanks to cash infusions from investors like Onex.
In the United States, there are now fewer than 4,000 public companies, down from more than 8,000 in the late 1990s. Meanwhile, asset managers long associated with public markets—names like Vanguard, BlackRock, and Amundi—are delving into private assets. According to projections by PitchBook, a Morningstar subsidiary specializing in private markets, the convergence between public- and private-market investing is only expected to accelerate.
The Morningstar PitchBook Listed Private Equity Indexes highlight publicly traded securities with significant private market exposure, like Onex. In a recent white paper, “Where Public Meets Private: Accessing Private Markets Through Listed Equities,” we explained how these indexes provide access to private markets while avoiding some of the pitfalls of private equity funds, including large outlays, long lockup periods, high fees, and postcommitment capital declines. The indexes leverage PitchBook data for both selection and weighting.
What’s Contributing to the Rise of Private Markets?
A number of forces have shifted the balance of power between public and private markets:
- Regulatory changes in the U.S. have advantaged private funds and private companies.
- Low interest rates since the financial crisis have eased the raising of private capital while pushing institutional investors out of low-yielding fixed-income assets.
- Companies may be deterred by the costs, hassles, and disclosure requirements of public listings.
- Public markets’ obsession with quarterly earnings reflects a short-term focus that challenges companies like WestJet.
By value, public markets are still multiples larger than private ones. But private-market investing is growing at a faster rate.
The chart below, based on PitchBook data, shows that between 2008 and 2019, private-market investors deployed $11.6 trillion into companies globally. In 2019, private equity funds raised more than $300 billion, an all-time high. Though the economic downturn of 2020 is hurting private markets, private equity managers are also likely to deploy significant levels of dry powder. As the opportunity set has shifted, private-market investing is attracting broader interest. Global asset owners are raising their allocations, following the Yale University Endowment model. According to Morningstar’s most recent count, several hundred U.S. mutual funds own stakes in private companies—though only a handful surpass 5% of portfolio assets. Vanguard made news in early 2020 by announcing the launch of a private equity fund that it eventually plans to open to retail investors. The SEC has even floated the idea of bringing private investing to the retail retirement market.
Indexing Private Equity
Listed private equity provides a gateway to private markets through easily investable securities. Many top private equity managers, including Onex, Blackstone, and Partners Group of Switzerland, are listed on exchanges. Closed-end funds—mostly investment trusts listed in the United Kingdom—are another means of accessing private equity through exchange-traded vehicles.
The Morningstar PitchBook Listed Private Equity Indexes highlight companies with significant exposure to private equity. The methodology tilts toward pure-play private equity firms, using PitchBook data on the composition of companies’ investment activities. Constituent weighting is also driven by the goals of diversifying across investment stage (early, mid, and late) and maintaining liquidity. In addition to providing access to a burgeoning market, the indexes’ back-tested returns are encouraging.
As private markets grow, investors need to expand their tool kits. The new indexes provide an accessible means of reflecting new market dynamics.
Dan Lefkovitz is a strategist for Morningstar’s Indexes product group.