Within the $22 trillion world of private capital, there is an asset class so large that it would be the second largest economy in the world

Private capital, which the Bank defines as assets not available in public markets, includes private equity, private credit and real assets. It has multiplied at an astonishing pace, doubling since 2012 to reach $22 trillion by 2024. This explosion has been driven by the decline in public markets. Since 2000, the number of listed companies in the United States has fallen by half to just over 4,000, even as the number of private venture-backed companies has increased 25-fold. Start-ups now stay private for 16 years on average, a third longer than a decade ago, reflecting a broad shift toward private capital and away from public scrutiny and regulation.

Bank of America says the world’s most transformative companies don’t appear in a stock market index. Just as public stock markets have a “Magnificent 7,” there are a “Private Magnificent 7” of Hectokern, each valued at $100 billion or more, and growing. Bank of America’s thematic research team estimates that their combined valuations have skyrocketed nearly five-fold since 2023 to $1.4 trillion. They evaluated the top 16 companies in this field, with a value of $1.5 trillion, which represents 1% of global GDP. There are several other “decacorns” (worth over $10 billion) and unicorns below them on the list.

For investors, Bank of America finds that private equity significantly outperformed the S&P 500 over this period, by six percentage points annually on average. Bank of America analysts add that there are other privacy benefits: “In the time we spend preparing financial regulatory paperwork every year, 12 great pyramids could be built in Giza.”

But as this asset class swells, financial experts warn that opacity generates risk, especially with respect to assets $1 trillion – $3 trillion pieces An asset class known as private credit. Public markets provide transparency, governance and liquidity; In contrast, private companies often avoid periodic reporting and are subject to less stringent oversight. This lack of visibility can mask financial and governance risks, with analysts urging investors not to overlook risks in their quest for returns.

Wall Street’s “fear index” – the VIX – rose more than 35% last month amid the bankruptcies of mortgage bank Tricolor Holdings and auto supplier First Brands, both of which were marred by alleged fraudulent events and losses, taking $100 billion off the market value of US banks. JPMorgan CEO Jamie Dimon warned“When you see one cockroach, there are probably more,” he added, pointing to the dangers of hidden risks in private lending markets. In fact, Damon has been chanting a similar tune since at least May. When he warned that non-bank lending “It has not been tested in recessions,” which implies that a flood of defaults could follow if a recession hits.

Capital allocation goes to the private sector

Historically, public companies have been viewed as the best way to achieve capital efficiency. They provided liquid investments, transparent financial data, and were accessible to everyone. However, private capital is rewriting the rules. As the number of companies seeking an initial public offering declines, public markets are losing their once-central role in economic growth. At the same time, innovation and digital transformation – sparked by revolutions such as OpenAI’s ChatGPT – are increasingly fueled by wealthy private investors. Since launching ChatGPT, Bank of America has found, Nvidia, Google, Microsoftand Amazon They have invested in nearly half of the world’s 100 AI companies

Data center deals that Driving a large portion of GDP growth Increasingly dependent on private credit. deadFor example, it got a nearly $30 billion financing package or a data center in Louisiana. Bloomberg reportedAdding that it is the largest private capital deal ever. The scale of spending in this area is unprecedented, with OpenAI alone estimating that it will take trillions of dollars to spend on infrastructure to keep up with rapid technological demands. In late October, argued Torsten Slok, chief economist at Apollo Global Management That private spending on building data centers has been so massive that “there has been no growth in corporate capital expenditures outside of AI at this moment.”

Even some of those who benefit from this are worried. OpenAI CEO Sam Altman He drew parallels with the dot-com bubble, warning that “someone is going to get burned out there” — especially since 95% of generative AI projects never make money, according to a recent report. A widely read piece of MIT research. Analysts warn that investors could face pain if speculative bets on infrastructure exceed real-world benefit or revenue, recalling lessons learned from the telecom sector’s excesses in the early 2000s.

The first phase of building AI was largely peer-to-peer, but now bond investors and private credit lenders are providing two to three times the financing of public markets. “Technologists” have tapped private credit for long-term sustainable loans, and the value of commercial mortgage-backed securities linked to AI infrastructure reached $15.6 billion in August, according to JPMorgan estimates at the time. Big deals now have financing horizons of 20 to 30 years – unusual bets on technologies whose commercial viability five years from now remains uncertain. “We are conservative in our assessment of forward cash flows because we don’t know what they will look like, and there is no historical basis,” said Ruth Yang, global head of private market analytics at S&P Global Ratings. He said Bloomberg In August.

Sean Tullywhich provided extensive private credit reporting for lucknote a distinction between the major players such as Apollo, Ares, and KKRwho are “pioneering a highly innovative strategy by offering independently originated credit, often backed by high-income assets from railcars to data centres, that locks in borrowers for a number of years.” Borrowers are willing to pay much more in interest than the long and expensive traditional syndicated loan process that requires ratings from Standard & Poor’s and Fitch and strict, sometimes lengthy, covenants.

Two top industry executives, David Spring of Runway Growth Capital and Ted Goldthorpe of BC Partners Credit, argued in a panel luck Comment this month And that private credit is not actually a mysterious bogeyman, but rather “structured financing built on cash flow, enterprise value, and downside protection.” Far from adventurous risk-taking, they claim that many private debt instruments are publicly listed or institutionally backed, while reporting audited financial statements and operating under legal and fiduciary obligations. They add that there are certainly riskier parts of the market with looser criteria such as diluted loans, aggressive structures, or promises of liquidity where the underlying assets are illiquid.

Earlier this month, Morgan Stanley CIO Wealth Management Lisa Shalit said luck She was particularly concerned about the size of the spending boom that was driven by private credit. “Every morning, the opening screen on my Bloomberg device shows what’s happening in the CDS spreads. oracle She said, referring to credit default swaps, the financial instrument notorious for the role it played in the global market collapse during the Great Financial Crisis of 2008. “If people start to worry about Oracle’s ability to pay, that would be an early signal to us that people are getting nervous,” Shalit said.

The long view: opportunity versus oversight

The radical shift towards private investment has huge implications for society. Bank of America analysts point out that as private companies expand, they shape how technology develops, how jobs are created, and how risks are managed. The top 120 private unicorns now boast a combined valuation equivalent to almost the entire market capitalization of Germany, indicating their enormous influence on the global stage.

Jim Rossmanglobal head of Barclays’ shareholder advisory group, has been tracking private assets with a particular focus on hedge funds for decades on Wall Street, and sees a broader shift happening. “The growth of private capital is actually a reflection of the fact that companies, especially those that are now post-Apollo and… Blackstone and TPG“They are approaching trillion-dollar platforms,” he said. luck In a recent interview, they noted that they have acquired their own insurance companies in some cases, and that they are growing beyond the traditional concept of an investment company.

Rossman said these companies are so flush with capital and assets that he sees the private capital boom facilitating the growth of alternative platforms to public markets. “You can see an era where private equity and private equity allow companies to stay private longer. He added that if 401(k)s were opened up to private equity investments, he could envision a kind of investment platform where wealth advisors could invest money as freely in the private equity space as they can now in stocks. “This would give you exposure to a much broader part of the economy than just what is general.”

Overall, the world of finance is going through many changes, Rossman added. “I think there is technological change, generational change, and finally, structural change (which) may be the most important is the growth of mutual fund investing.” Rather than viewing private capital as something murky and risky, Rossman said it opens up more types of companies to investment, and that is likely to grow and even transform in ways that will surprise many investors.

Rossman recalls buying his first mutual fund through a leading asset manager in the late 1990s: “It was 300 basis points, three percentage points to join, and they would pick 28 interesting technology companies… and then, oh, the expense ratio would be two-and-a-half, 250 basis points a year.” Today, he said, the index fund revolution has democratized getting to the point where you can get the same fund for just 5, 15 or 25 basis points. “It’s unbelievable.”

As the line between public and private capital blurs, the $22 trillion world of private capital is not just a financial story — it is a sign of how our economies, companies, and innovations will be built and valued in the years to come. With private assets rivaling the size of national economies and the biggest names in technology betting big outside the public eye, leading analysts believe this is a revolution that is just beginning.