We are currently in a more volatile environment characterized by higher interest rates and inflation and lower real economic growth prospects. Looking ahead, this more challenging macroeconomic environment will likely continue to slow global financing activity and dampen returns in both public and private markets.

Some observers have warned that private markets are particularly exposed to this environment and that we are at the end of the golden era for buyouts. We disagree, not least because we have heard this tale before. Such predictions were voiced in 2000 after the strong rise in technology, media, and telecoms buyouts, when private markets were valued at about $1 trillion. No such bust took place, and a decade later, private markets had tripled in size to about $3 trillion. And again, after the great financial crisis, it was predicted that private markets had peaked. Since then, private markets have more than tripled to $10 trillion.

As we have seen in previous downturns, we believe that private markets will continue, on a relative basis, to outperform public markets, and a more difficult market environment will not reverse the trend we have been describing. Quite the contrary. The switching of roles between public and private markets is not cyclical; it is a structural change that has been underway for the past 30 years.

The role reversal between public and private markets will drive an equally important change among private markets firms, especially because the rising significance of the asset class will see new entrants to the market, including major established financial groups looking to benefit from this growing segment. Naturally, investment firms will distinguish themselves through their offerings, cost structures, and client service, but, most importantly, they must differentiate themselves by their approach to investment.

Private markets firms need to transform and adapt assets to build the resilient business models of the future.

Active and passive investment are familiar terms in public markets. A similar distinction will be key to the differentiation between private markets practitioners—some will be more passive, others more active. But in private markets, this difference will mean something quite distinct. In public markets, an “active investor” is a stock-picker who targets outperformance by choosing the right stocks at the right time—usually with little evidence of success. In private markets, being active means far more and accounts for greater outperformance.

Truly active private markets firms are business builders that combine scale of resources with an industrial-style transformational investing approach to deliver real value creation. But how should private markets firms go about developing this value-creation strategy? We believe they can learn a lot from successful, diversified industrial groups or, as they are sometimes known, conglomerates.

A classic conglomerate and a private markets group have more similarities than one might at first assume. In both cases, there is an array of separate operating companies owned by an overarching entity. There are also similarities in the network effects that a conglomerate and an active private markets group can realize between their subsidiaries/portfolio businesses.

Active private markets participants must take the best that the conglomerate model has to offer, while studiously avoiding its mistakes and risks. Studying diversified industrial groups, the most successful rank very highly in five specific dimensions: strategic rigor, entrepreneurial governance, operational excellence, the use of proven playbooks, and talent strategy.

Across these five factors, the single unifying theme is an understanding of what real value creation looks like and where it takes place within companies. Modern and successful active private markets firms are not financial services companies. Astute acquisitions and financial efficiency are essential, but the modern private markets firm should be focused on active investing and outperformance rather than a more passive, scale-driven approach.

With rapid change across global giga themes such as digitization, decarbonization, and changing consumer preferences, as well as accelerating technological disruption, private markets firms will need to continually transform and adapt assets to build the resilient business models of the future. Active private markets firms will focus on agility, innovation, and entrepreneurial ownership to keep pace with this changing environment—and, in doing so, will build our future sustainable economy. Offense will be the new defense.