In Steffen Meister’s white paper about how private markets are overtaking public markets in financing the “real economy,” the Partners Group chairman argues this role reversal will “fundamentally reshape the private markets industry in the future.”

In the paper published on Monday, Meister demonstrates how the private sector is increasingly relied on as “stewards of the future economy,” a role historically played by the listed sector.

He points to capital raising trends. In 2010, global equity issuance was worth more than twice the value of funds formed in private markets. But that imbalance slowly reversed and, in 2016, private markets fundraising overtook equity issuance in public markets. Since 2017, annual global fundraising in private markets has approached or exceeded $1 trillion annually. In 2022, by comparison, about $400 billion was raised in public offerings.

He posits another break from tradition, whereby most IPOs nowadays are for companies yet to demonstrate positive earnings, whereas private markets – once better known for “opportunism and financial engineering” – are increasingly the preferred arena for healthier businesses with actual growth. Notably, he says real estate is on the same pathway.

Much of this narrative can indeed be applied to property markets: for example, private real estate fundraising, blip years aside, has been on an upward trajectory, while real estate IPOs have reduced in volume. His observation about listed vehicle earnings, on the other hand, rings less true for real estate: REITs without positive earnings are uncommon, as most are stabilized businesses with well-tenanted portfolios; the listing of SPACs, the extreme end of IPOs with negative earnings, is absent altogether in real estate.

Nonetheless, a comparison of the treatment of earnings for listed and unlisted real estate underscores a critical idea presented by Meister. It would be remiss to compare listed real estate earnings with those of corporates, but the “renewal, repurposing and transformation” work, which he points out will be key to real estate’s future contribution to the economy, is better executed away from the pressure to make the kinds of distributions traditionally expected by equities investors.

Meister acknowledges many listed property companies would reject the idea they are structurally unsuitable to resource the transformational work required to keep real estate contemporary with the fast-evolving needs of today’s occupiers. It could also be argued the lion’s share of listed real estate, in fact, requires the least lifting. Logistics, housing and various forms of alternative assets dominate the holdings of today’s REITs. These sectors boast institutional confidence in their future occupational use. Office, the mainstream sector expected to require the most remedial work, on the other hand, is conspicuously absent from listed ownership.

This next period of repositioning, then, will be critical to determining the future viability of listed real estate vehicles. Indeed, with ESG compliance increasingly onerous, there is greater need for a more labor-intensive and complicated customer-centric proposition, as opposed to the more passive institutional play centered around traditional landlord-tenant dynamics which was previously prevalent. It is fair to wonder whether REITs, with their obligation to pay out the vast majority of their earnings in dividends, can be equipped to meet this greater, recurring expenditure.

Listed real estate businesses – and their shareholders – must reconcile with exactly this demand if they are to claw back market share from their private counterparts. Failure to do so could mean the status quo depicted in Steffen Meister’s white paper remains the norm.