Private markets have grown exponentially over the last two decades, driven by attractive long-term returns, diversification benefits, and early-stage value creation. As companies stay private longer, much of their initial growth can be realized outside of public markets, which could challenge the small-cap premium and contribute to a shift in the composition of public markets. The following newsletter examines this dynamic and potential impact on small-cap stocks.
Topic Tags: Private Equity
I Want a New Drug
The aging population in the United States has garnered increasing attention over the past two decades, coinciding with the retirement of the Baby Boomer generation and the associated rise in age-related chronic conditions such as arthritis, Alzheimer’s disease, and cancer. As of 2023, over 59 million individuals (17.7% of the U.S. population) were aged 65 or older, and this figure is projected to approach 80 million by 2040.¹ A central challenge associated with this demographic shift is ensuring adequate care, particularly through the effective management of chronic illnesses. One critical avenue for addressing this issue is through investment in the development of efficient and innovative pharmaceutical therapies.
Since 2015, pharmaceutical companies have experienced revenue losses totaling approximately $125 billion due to the expiration of patent exclusivities, with projections indicating nearly double that amount may be lost by 2030. While elevated interest rates and heightened regulatory scrutiny by the Federal Trade Commission contributed to a significant decline in merger and acquisition (M&A) activity in 2022 and 2023, the sector may be well-positioned for a resurgence.² Many drug manufacturers currently maintain robust balance sheets and hold over $180 billion in cash reserves, potentially fueling a new wave of strategic acquisitions.
Realizing a sustained M&A resurgence in research and development will require targeted investment within the biopharmaceutical sector, particularly in early-stage drug development and in the services and technologies that support these endeavors. These include start-ups advancing compact and automated manufacturing technologies, which help mitigate the impact of rising domestic labor costs and offer a competitive edge.
Beginning in the third quarter of 2024 and continuing through the first quarter of 2025, there has been a notable increase in M&A activity. Key transactions include:
- Johnson & Johnson’s $15 billion acquisition of Intra-Cellular Therapies, focused on central nervous system (CNS) disorders
- GSK’s $1 billion acquisition of IDRx, a developer of precision oncology therapies
- AbbVie’s acquisitions of Aliada Therapeutics ($1.4 billion, CNS therapies) and Nimble Therapeutics ($200 million, immune-mediated disease therapies)
Following the first quarter of 2025, newly imposed tariffs have intensified the need for U.S.-based investment, as protectionist trade policies heighten the demand for domestic pharmaceutical production capacity and infrastructure. Couple that with the aforementioned demographic trends in the U.S., we have an investment environment poised for growth.
¹ America’s Health Rankings analysis of U.S. Census Bureau, Single-Race Population Estimates via CDC WONDER Online Database, United Health Foundation.
² Evaluate | Company Profiling search database
1Q 2025 Market Insights
This video is a recording of a live webinar held April 16 by Marquette’s research team analyzing the first quarter of 2025 (and recent weeks) across the economy and various asset classes as well as themes we’ll be monitoring in the coming months.
Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.
Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Hayley McCollum, Senior Research Analyst
Chad Sheaffer, CFA, CAIA Senior Research Analyst
Sign up for research alerts to be invited to future webinars and notified when we publish new videos.
If you have any questions, please send our team an email.
Bracing for Stagflation
As markets swirl and stagflation fears mount, what should investors do?
Our newsletter last week outlined the broad context of President Trump’s new tariff policy as well as the most notable market impacts. Granted, the news seems to change daily, as does the market’s reaction; trying to pen a targeted newsletter is an almost worthless endeavor because by the time the ink has dried, markets have shifted due to another policy pivot. In the short term, the omnipresent cloud of uncertainty will continue to drive market volatility and investor sentiment. The best recipe for investors to weather this storm is patience and discipline, both of which can be difficult to come by in the current environment.
As we step back and take a longer-term view of the future, however, the threat of stagflation is becoming more realistic. Coined as a combination of the words “stagnation” and “inflation,” it is an economic backdrop characterized by high inflation, slow economic growth, and in some cases, high unemployment.
In this edition, we examine which asset classes are most exposed to stagflation and which can offer shelter.
New Year, New President…Same Outlook?
From an investor’s perspective, the current environment feels lot like it did twelve months ago: U.S. equity markets returned over 20% the prior year, fixed income is (still) offering attractive yields, and overall portfolio performance was positive for most programs. Nevertheless, nothing lasts forever and sentiment can shift on a dime. It is also likely that some of President Trump’s policies will have an impact on markets, with the specific impact varying by the policy and asset class.
In this edition:
- U.S. Economy and Policy Expectations
- Fixed Income: “If you liked it last year, you’ll like it this year”
- U.S. Equity: Concentration risk still looms
- Non-U.S. Equities: Positive earnings outlook, policy uncertainty
- Real Assets: Real estate bottoms, infrastructure demand robust
- Private Markets: Private equity on the rebound, private credit still compelling
2025 Market Preview Video
This video is a recording of a live webinar held January 16 by Marquette’s research team analyzing 2024 across the economy and various asset classes as well as themes we’ll be monitoring in 2025.
Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.
Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Michael Carlton, Research Analyst
Chad Sheaffer, CFA, CAIA Senior Research Analyst
Sign up for research alerts to be invited to future webinars and notified when we publish new videos.
If you have any questions, please send our team an email.
Football is in Full Swing…and Private Equity Wants a Piece!
The 2024 National Football League regular season is at its midpoint, meaning employees in Marquette’s Chicago office are enduring another challenging season from the hometown Bears. While the growth of rookie Caleb Williams is not a viable topic for a Marquette newsletter, recent developments off the football field are worth exploring in greater detail. To that point, NFL owners recently approved a measure that will allow private equity firms to purchase small stakes in teams, marking a notable shift in the league’s ownership rules. This newsletter highlights the motivations, details, and implications of this recent change.
3Q 2024 Market Insights
This video is a recording of a live webinar held October 23 by Marquette’s research team analyzing the third quarter of 2024 across the economy and various asset classes and themes we’ll be monitoring over the remainder of the year.
Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.
Sign up for research alerts to be invited to future webinars and notified when we publish new videos.
If you have any questions, please send our team an email.
Can Interest Rate Cuts Revive Private Equity?
It has been well documented that private equity has been experiencing pressures over the past two years, marked by declines in both deal activity and recent performance relative to the strong returns generated in prior years. Since the asset class is heavily reliant on leverage to fund deals, the private equity landscape has been impacted by the historic rise in interest rates that has made debt more expensive over the last several quarters. That said, the Federal Reserve has now shifted its policy stance with inflation seemingly contained, and several rate cuts are expected to occur in the near term. But will lower rates drive a rebound in private equity activity?
While a recovery in activity likely won’t occur overnight, private equity firms seem to be preparing for a significant increase in deal making on the horizon. Due to the high financing costs associated with higher interest rates, recent years have seen a shift away from debt-laden leveraged buyouts (LBOs) and towards growth and expansion deals, as those transactions typically require minimal leverage. Over most of the last 15 years, LBOs consistently accounted for a larger share of U.S. private equity deals relative to growth and expansion transactions, but this dynamic reversed in 2023. We do not expect recent trends to continue in perpetuity since lower borrowing costs should usher in a new wave of LBO activity. More broadly, M&A activity appears to be showing signs of turning a corner. To that point, in the first half of this year, North American M&A activity advanced by roughly 13% on a year-over-year basis in terms of both deal count and value (including estimates for unreported deals).
In short, recent shifts in monetary policy may provide tailwinds for the private equity sector. In addition to lower borrowing costs that will likely underpin future deal activity, rate cuts also benefit existing portfolio companies by easing the debt service burdens on their balance sheets. This offers companies the flexibility to pursue new acquisitions, initiate organic growth initiatives, and, ultimately, drive potential returns higher for investors. As always, we continue to closely monitor the emerging trends and their implications for the performance of the private equity asset class.
The Magnificent Five of Private Equity
In investment management, asset allocators and their advisors frequently revisit the concept of portfolio diversification — whether by geography, market capitalization, security, or industry. While Marquette advocates for a diversified portfolio within private markets, it is important to recognize that not all diversification strategies are equally effective. Certain industry characteristics make specific sectors more attractive for private investments, particularly those that exhibit sustainable growth driven by favorable demographic or secular trends, fragmentation, capital constraints, and market inefficiencies. These features are often advantageous in private markets as they create opportunities for value enhancement and potential alpha generation.
Within the private equity asset class, five core sectors — what we refer to as the “magnificent five” — have consistently dominated merger and acquisition activity over the past six years. These sectors are healthcare, technology, industrials, business services, and financial services. According to Dealogic, over 60% of deals across 13 tracked industries have been concentrated within these five sectors, as measured by transaction count. Moreover, these industries have outperformed relative to top-quartile multiple on invested capital (MOIC). It is therefore logical that private equity managers would focus their capital in areas with higher probabilities of outsized returns, which in turn shapes the composition of investor portfolios. It is also important to note that this concentration also intensifies competition for deals within these sectors.
A critical point to consider is the dispersion of returns between top and bottom quartiles across industries — the wider the dispersion, the greater the risk. It is no surprise that the highest-performing industries, healthcare and technology, are often heavily represented in private equity portfolios. In this competitive and risk-laden environment, particularly within the private equity asset class, manager selection becomes increasingly crucial for investors seeking to achieve superior outcomes.