Private markets offer institutional investors a more powerful way of investing in climate solutions than public markets, according to a report from research company MSCI.
The financial analysis firm compiled peer groups of companies in both private and public markets with exposure to “low-carbon solutions” – specifically, greener transportation, low-carbon power generation and energy storage.
Since Q2 2019, private markets-backed companies delivered cumulative returns of 123 percent up to June 2024. This compares with 57 percent cumulative returns for publicly listed energy-transition-focused companies over the same period, says MSCI.
The private markets peer group also compared favourably with the wider private markets investment universe. A private markets portfolio – reweighted to match the asset class mix of the climate solutions peer set (for example, the infrastructure component is increased) – returned 97 percent over the same period.
Pool sizes
There is a vast difference, however, in the size of the two markets; with a market cap of $4.4 trillion, the public markets peer group is 23 times larger than the $189 billion net asset value of the private markets peer set.
“The value of the private solutions set has been on a relative tear,” the report states. “The five-year compound annual growth rate was 17 percent through June 2024, while for the public set it was a more modest 11.9 percent.”
This rapid growth in NAV primarily represents increased fundraising and investment activity by climate funds, rather than growth in the size of individual assets.
Apples and oranges
In terms of performance, MSCI urges caution when making comparisons between private and public markets, “as the dynamics can differ”.
“For example, the quarterly returns in the private markets were based on exited and active investment holdings, making them subject to factors such as lack of liquidity, irregular cashflows, subjective valuations and smoothing. In the private active investment holdings, valuation smoothing understates volatility, especially for shorter time horizons, while public equity valuations are not subject to smoothing.”
Nevertheless, the report notes that the information available to investors about private markets strategies – in particular, the types of climate-related assets they are targeting – is becoming more granular. “We see this information getting a closer look in 2025 as climate change intensifies and investors zero in on the search for solutions.”
