The Growth of Private Financial Markets

Abstract

Over the past decade, “private” financial markets, which face little oversight by regulators, have grown to the point where they dominate financial activity. Private funds have approximately tripled in size in the last decade to $26 trillion in gross assets (compared to the $23 trillion in the U.S. commercial banking industry). Private markets raise more in equity than public markets: in 2021, new stock issuances resulted in $434.7 billion, while private markets raised $1.73 trillion in committed funds that same year–almost four times as much. Private markets are structured differently–organized into funds by asset managers as limited partnerships, which shields general managers from liability. The primary dealers in these private markets are venture capital, private equity, private credit funds, and private real asset managers. In this working paper, we examine four institutional shareholder types: public and private pension funders, endowment plans, and foundations. Institutional shareholders now allocate 28-35% of their assets under management to the “alternative” assets of private markets. Pension funds alone currently account for $2.7 trillion in committed funds to private financial markets, the latter of which has ballooned to $26 trillion in gross assets. This development potentially represents new systemic risks to the economy at large and for the institutional shareholders participating in these markets.