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 believe this sector is 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 2023.³ This has transformed cash into an important asset class.⁴

For firms in private markets, a higher-rate environment is not just an issue in terms of raising capital or discounting potential 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, we believe 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 may have a negative impact on the firm’s bottom line since, in real terms, it may be constantly losing value.

This is why firms in private markets may be increasingly turning to money market funds to help them manage short-term cash.

Past performance is not a reliable indicator of current or future results. Forecasts are based on estimates and assumptions. There is no guarantee they will be achieved.

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 seek capital preservation and liquidity.

There are different types of MMFs, ranging from treasury-style funds to prime money market funds, which carry some level of exposure to credit risk—the possibility that a borrower or issuer of a security held by the fund may default on their financial obligations. Meanwhile, ultra short bond funds (investment funds that primarily invest in bonds and other debt instruments with very short maturities) target returns in exchange for slightly reduced liquidity. 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.⁵

Many private market firms make use of subscription lines—short-term credit facilities secured against investors’ capital commitments to a fund. While these lines may provide immediate liquidity to bridge capital calls or manage cash flow, their nature as a debt instrument means the cost of interest can reduce potential overall returns and increase the firm’s financial risk. As a result, some of the leading firms in the sector are now integrating MMFs into their investment processes: as potential short-term cash may arrive in the business (e.g. capital calls, distributions or successful exits) it may be swept automatically into an MMF. The potential cash may be held until it is needed, such as for investment in portfolio companies or sharing (LPs).