AI ignited a private market boom. Wealthy investors want more

Wealthy investors are flocking to artificial intelligence startups — and fueling a private market renaissance.

To get a piece of today’s pioneering AI firms, investors have to go through private markets, where most tech startups still reside. Waves of new technology have long meant new companies and eager investors hoping to be among the first to pour money into the next big thing. But the AI boom comes at a time where there are significantly more private companies, and they are tending to wait longer to go public. The draw of getting in on AI is serving as a gateway for well-heeled investors to pour more money into a wider array of private companies, wealth managers and others say.

The rise of AI has sparked a constellation of startups promising to provide the data, infrastructure, chips, energy, and models to support the technology. Some of the biggest players in AI, including OpenAI, Anthropic, and Perplexity, are private companies. While anyone can buy and sell shares of publicly traded companies, private markets are more restricted, typically open only to accredited or institutional investors.

Over the past two years, nascent interest in private market investment has grown into considerable activity, said Michael Gaviser, head of private markets at Morgan Stanley (MS+2.77%) Wealth Management. The total size of all companies on U.S. private markets grew to $11 trillion in 2023, up from $242 billion in 2010, according to the latest EY Global Alternative Fund Survey.

That’s largely due to an ongoing generational wealth transfer, said Jun Li, who heads global and Americas wealth and asset management at EY. One estimate suggests that $84 trillion in assets could change hands over the next 20 years.

Recent research by consultancy Bain & Co. projects that private market assets under management will jump to as much as $65 trillion by 2032 — growing at more than twice the rate of public assets.

Michael Weisz, co-founder and CEO of the private markets investment platform Yieldstreet, said the recent uptick in activity is just the tip of the iceberg.

“I think for the next five to seven years, the private markets are going to accelerate,” he said.

Another key to the private markets boom is that investors, including institutional portfolio and asset managers, are hedging against public market concentration and volatility by investing in private funds, Li said.

The growth in private investment is giving rise to even more valuable private companies: Some 87% of firms with revenues of $100 million or more are private, according to S&P Capital IQ (SPGI+1.37%). That means private markets represent a growing and increasingly lucrative opportunity.

“If I’m an investor and I want to hitch a ride on economic growth… and I’m not doing private [companies], I’m missing out on a huge piece of the economy,” said Gaviser, of Morgan Stanley.

With a significant portion of AI development happening at private companies, investors are being drawn to private markets — and then staying there, Gaviser said.

“While AI has been the big story of this year, I think it’s a catalyst for private markets to continue to grow interest in the space,” he said. “We have people coming to us all the time saying, ‘Well, what else is there for me to do?’”

Bigger, broader opportunities

One of the most important investing rules is to keep a diversified portfolio.

Next year, Gaviser expects to see “a broadening out of private market activity generally, where the deal flow is not going to be as concentrated in a few sectors.”

“We’re looking at deals all over the map,” he said. Outside of tech, areas such as consumer goods, real estate, hospitality, and healthcare are already seeing a pickup in activity, Gaviser said.

Private credit will also continue to be a “hot asset class” in 2025, Yieldstreet’s Weisz said, in addition to private equity and real estate given that asset prices remain attractive.

The number of public companies in the U.S. has shrunk from more than 7,000 at its peak in the late 1990s and early 2000s, to less than 4,000 today. In that same period, the number of private companies has ballooned to more than 25 million.

That’s partly because companies are staying private for longer. As of 2022, the median age of a company before going public was 12 years, according to one study. That’s at least double what it was in 1980. (Gaviser puts the figure closer to 14 years now.)

‘Give the client as much choice as possible’

To keep up with the rapid pace of growth, major Wall Street firms and asset managers are expanding their offerings to snag a slice of the private market pie.

Morgan Stanley launched its private markets transaction desk in March. It’s designed to help clients looking to buy and sell private company shares.

BlackRock (BLK+1.78%) made three major private market acquisitions this year, including plans to buy private credit firm HPS Investment Partners for about $12 billion earlier this month. BlackRock CEO Larry Fink said the deal will grow the firm’s private market client assets to more than $410 billion, and is a recognition of the growing demand among investors for access to private equity.

“Private markets are no longer a separate or a standalone exposure for our investors,” Fink said in a call with analysts earlier this month. “The blending of public and private in today’s reality is a part of the entire market of today.”

In September, Citigroup announced a $25 billion private credit and direct lending program in partnership with Apollo (APO+1.06%), which will allow Citi’s (C+1.86%) large banking client base to tap into burgeoning private markets.

In the “last couple of years you saw the private market advantaged,” Citi CEO Jane Fraser told Bloomberg last month. “The goal here from our perspective, give the client as much choice as possible.”

Some on Wall Street are more skeptical about the shift toward private markets. JPMorgan Chase (JPM+2.57%) CEO Jamie Dimon has repeatedly questioned whether the rise in private companies is good for investors and markets.

“Private markets have grown dramatically, and they don’t have the same transparency and liquidity and research,” Dimon said in September at the Council of Institutional Investors conference. “You may think that’s a good thing, and there are good attributes, so it’s not a criticism, but is that what you want?”

As asset managers try to woo retail investors and newer entrants into private markets, startups could feel pressure to increase the frequency and accessibility of financial reporting, said EY’s Li.

“Some of that is going to be really led by the retail investors getting access to private markets products,” he said. “I think that on its own is going to require a lot more transparency, just from a customer experience and reporting perspective.”

Tender offers

Tender offers have also become a driver of private markets activity this year. Tender offers allow stockholders in a private company to sell some or all of their shares, either to another investor or back to the company itself. It’s a way for private firms to both raise cash and reward employees.

Tender activity climbed 44% year-over-year in the third quarter, according to data released by software platform Carta earlier this month. Jamie Hutchinson, a partner in the private equity group at Goodwin, told Carta that the market for tender offers is busier than he’s ever seen.

OpenAI has reportedly given employees the chance to sell roughly $1.5 billion worth of shares to Japan’s SoftBank Group (SFTBY-2.06%). Employees have until Christmas Eve to decide whether to participate, according to CNBC. That comes on the heels of a $6.6 billion funding round that valued the ChatGPT maker at $157 billion, making it the second-most valuable private company in the world, behind TikTok parent ByteDance.

But as private companies get bigger — especially companies with massive demand for their products — going public ultimately provides more permanent access to capital, said Gaviser, of Morgan Stanley.

“Once you get to be a certain size, the public markets do a better job than the private markets do,” he said. “If you look at some of these tenders out there, they’re a fraction of the value of the company.”

History offers some guidance when it comes to the 2025 market. After the 2008 financial crisis, a rise in tender offers set the stage for an upswing in initial public offerings, Hutchinson said. He expects a similar dynamic next year.

“I think there’s a direct correlation between tenders and IPOs,” he said. “If history repeats itself — which it tends to — this moment of time tells us that a year to a year and a half from now, we will be seeing an increase in IPOs.”

Morgan Stanley CEO Ted Pick said on a call with analysts in October that while private markets are booming, there is pent-up demand for IPOs that will likely begin to unravel next year.

“There are a whole bunch of great companies that are owned privately that do want to make their way into the public markets,” Pick said. “I think we’re going to see the IPO market slowly work its way back, larger names coming to market.”

At Yieldstreet, Weisz sees growing investor confidence in the direction of the market, the U.S. economy, and risk-taking in investing that could help fuel another year of healthy returns.

“That’s going to drive a bullish economy,” he said, “both in terms of the public market and the private markets.”