Money market minute

The private market sector is growing rapidly, with assets projected to increase from $13 trillion today to more than $20 trillion by 2030. This growth is bolstered by the democratisation of private markets and its accessibility to a broader and more diverse investor base. Last year, private equity investment saw a sharp increase in dealmaking activity following a challenging period of inflation and rising interest rates. And although inflation has moderated, interest rates remain elevated and are likely to stay higher for longer in this competitive landscape.

Private markets firms have realised that they can gain a competitive edge by optimising their cash management strategies. And this is where money market funds may come in. Money market funds are highly regulated mutual funds that prioritise capital preservation and liquidity. The same-day access to cash that they provide can make them a very attractive solution for private markets.

Firms looking to balance risk with opportunity. Also, compared with holding cash with a bank, money market funds can also potentially provide diversification during periods of market volatility.

There are various types of money market funds available, ranging from Treasury-style funds to prime or low-volatility net asset value funds and ultra-short bond strategies, allowing investors to really consider the best solution for their needs.

In terms of how money market funds are being utilised by private markets firms, we believe there are multiple applications—whether it's private equity firms using them to manage cash between capital calls and investments where a supply might not be viable, or post-exit before distributing cash to investors.

There could be private debt firms looking to park cash required for lending activities, or a collateralised loan obligation (CLO) during the ramp-up period to help reduce that cash drag, real assets firms to house cash reserves, or venture capital companies between funding rounds and investments.

Money market funds can also be used to manage the corporate treasury cash of the general partner or, increasingly, the underlying portfolio companies that they invest in.

Ultimately, many private markets firms are recognising that there can be an operational cost when managing cash and taking a more proactive approach. Incorporating money market funds as part of the strategy—whether it's for a long or short period—could potentially improve efficiency, help generate operating alpha, and boost the bottom line.