Why money market funds play a vital role in private markets

Research shows that the total value of private-market assets – including debt and equity investments in private businesses as well as infrastructure and real-estate holdings – is on course to rise from US$10 trillion in 2021 to more than US$18 trillion by 2027.¹ In 2024, meanwhile, there was a sharp rise in distributions from private equity investments, along with a rebound in deal-making and exit activity.²

It is clear this is a sector that has recently experienced solid growth, and we expect this sector to continue at pace over the next few years as the market is increasingly democratized to an ever-wider investor base.

The significant inflation that emerged after the pandemic, further intensified by rising geopolitical tensions, prompted central banks in Europe and North America to swiftly raise interest rates in 2022 and 2023. This has transformed cash into an important asset class once again after years of very low, or even negative, returns.

For firms in private markets, a higher-rate environment is not just an issue in terms of raising capital or discounting long-term investment returns. There is also an important operational element related to the cost of holding cash – whether this is in the form of money awaiting distribution to limited partners (LPs), capital calls from investors or management carry.

At the same time, the last few years have been synonymous with periods of heightened volatility and market risk. Events such as the 2023 collapse of Silicon Valley Bank and subsequent concerns regarding the creditworthiness of some European banks, combined with geopolitical and macroeconomic uncertainty, have led many institutions, including those within the private markets space, to re-evaluate how and where they are holding cash. The importance of diversification and avoiding the cash concentration risk that comes when holding cash on balance sheet with a bank, for example, has become more of a focus for many private market firms.

While this cash may not be sitting in the business for long periods of time, there is still likely to be a cost of holding such cash, especially given the large sums involved. Money that is held on deposit in a non-interest-bearing account will have a negative impact on the firm’s bottom line since, in real terms, it is constantly losing value.

This is why firms in private markets are increasingly turning to money market funds to help them manage short-term cash, and to generate higher yields alongside "operational alpha" – the bottom-line improvements linked to higher levels of operational efficiency.

Money market funds (MMFs) are a type of highly regulated mutual investment fund that may invest in cash, cash equivalents and short-term fixed income securities such as sovereign and corporate debt as well as repurchase agreements (repo). They prioritise capital preservation and liquidity. MMFs offer institutions and private investors a liquid and diversified portfolio that may generate better returns than bank deposits, with low levels of risk.

There are different types of MMFs, ranging from treasury style funds that are only exposed to government risk, to prime money market funds which have some level of exposure to credit risk – albeit over the very short term and limited to very high-quality securities. Meanwhile, ultra short bond funds target slightly higher returns in exchange for slightly reduced liquidity. Investors have the option to select the type of MMF that best suits their investment requirements.

Following the interest-rate rises of recent years, inflows into MMFs have accelerated as investors have sought to manage their cash holdings more effectively. Even as central banks started to loosen monetary policy in 2024, allocations to MMFs remained robust as a result of economic uncertainty and the possibility that interest rates might have to stay higher for longer than previously thought.³

At BlackRock, we have seen a sharp rise in demand for cash management solutions from firms in private markets, such as private equity managers, infrastructure investment consortia and even venture capital firms. Increasingly, these organizations are coming to recognize the downside associated with their traditional approach to holding cash. Returns on bank deposits are typically close to zero in the current environment, and while many private market firms make use of subscription lines, they also face challenges here: while subscription lines provide short-term liquidity, their nature as a debt instrument means the cost of interest can impact overall returns while increasing the firm’s risk.

As a result, leading firms in the sector are now integrating MMFs into their investment processes: as short-term cash arrives in the business (e.g. capital calls, distributions or successful exits) it is swept automatically into an MMF. The cash is held until it is needed, such as for investment in portfolio companies or sharing among limited partners (LPs). This way, firms can avoid the negative impact of cash drag on their bottom lines, while also effectively outsourcing some of their cash management function – thereby increasing efficiency.

We believe BlackRock’s clients benefit from our considerable experience and expertise as well as our scale. We have almost 50 years’ experience of managing clients’ cash through numerous rate cycles and market events, and we are currently responsible for assets worth almost US$931 billion across our global MMFs.⁴ With interest rates set to remain high relative to recent history for the foreseeable future, private market firms should act now to protect their cash and boost their bottom lines.