Investing in private assets

Private assets: a burgeoning asset class for retail investors

Shares and bonds are the traditional make-up of many investment portfolios, but opportunities to also invest in private assets are opening up for retail investors.

Regulatory rules, for example, are expected this year from the Financial Conduct Authority on broadening retail access to long-term asset funds, a category of authorised open‑ended funds designed to enable investors to invest in long‑term illiquid assets.

As well as regulatory support, private equity – one example of a private asset – is likewise targeting individual investors, according to a report by Bain & Company.

Analysis by the consultancy found that individual investors hold roughly half of global assets under management, but represent 16 per cent of AUM held by alternative investment funds.

While individual investors are therefore traditionally exposed to public markets, these liquid markets are a smaller proportion of world economic activity when compared to private markets, says Tom Douie, chief executive of PM Alpha, a digital marketplace for private market investments.

“I look at it as an iceberg,” he says. “If your iceberg is global economic activity, the part of it you can see above the waterline is the listed companies on the Nasdaq or the FTSE, etc.

“Whereas the vast majority of economic activity is not in public hands, it is private enterprise, some of them extremely large. And that’s the iceberg below the waterline.”

What benefits can private assets bring?

Private assets can therefore be a diversifier, which is “extremely important in a world where public markets are becoming more and more concentrated, with fewer companies populating the indices,” says Douie.

As well as a source of diversification, private assets can dampen volatility, adds Ingrid Neitsch, head of private equity and debt at St James’s Place.

Also citing private equity as an example of a private asset, she says: “It’s a dampening of volatility, simply because of the way private equity trades.

“It doesn’t have the sentiment aspect that you see so much in traded markets. So it tends to be a bit more muted on the upside and the downside.”

Private assets can also offer an additional return over publicly quoted assets because of the ‘illiquidity premium’, says Tom Treanor, head of research at AVI Global Trust.

“In return for giving up the ability to trade in and out, investors are rewarded with an additional return over and above that experienced within public assets,” he adds.

Downsides of private markets

Although investors can be rewarded for their patience, the illiquidity that can come with investing in private assets is often the first cited risk.

“I wouldn’t put a significant amount of money into private assets, unless one is extremely comfortable,” says Neitsch. “At SJP in our multi-strategy portfolios, we recommend no more than 5 per cent, so it is really a small amount.”

Liquidity can also depend on an event. In the case of private equity, Neitsch says: “You’re waiting for the private equity company to improve performance, systems, costings, supply chains, etc. And then you’re waiting for an outcome.

“Until then, there’s not a lot of activity that you’re going to see in the underlying instrument. So by beginning to take the money out early, you’re also cutting off your opportunity for performance.”

But depending on their personal circumstances, illiquidity could work in an investor’s favour.

“I would argue that having something which is, in some way, locked up safely is good personal discipline,” says Douie. “Because the temptation is always to sell at the worst moment, and buy at the worst moment.”

Alan Gauld, lead portfolio manager of the Abrdn Private Equity Opportunities Trust, likewise says his experience is that many investors invest in private equity at the wrong time; that is, at the top of the market cycle to try and capture strong returns in the good times, and leave the asset class at the wrong time near troughs in the cycle, to free up capital in their portfolio.

He says: “Staying invested is important to fully benefit from the asset class, as private equity tends to make many of its best investments at the lower end of the market cycle, when more differentiated investment opportunities come to market like public to private transactions, corporate carve-outs and family sellers, and entry pricing is a bit more sensible.”

How can retail investors access private markets?

Private markets have traditionally been inaccessible to all but the very wealthiest of individual investors, says Gareth Lewis, chief executive of Delio, a private markets fintech.

But he adds that growing demand from retail investors means that there are now more points of access available.

Direct access to private equity funds for, example, can be difficult, says Gauld. “The best-performing private equity managers are over-subscribed, and have minimum cheque sizes of between $5mn (£4mn) and $20mn, requiring deep pockets.

“In addition, funds often have a J-curve where the fund is investing and charging fees, but assets are not yet growing in valuation.”

One way that Gauld says retail investors can also address illiquidity is by investing in private equity via an investment trust on the London Stock Exchange, providing daily liquidity.

“Most of the listed private equity investment trusts have been around for decades, and are of a size and scale to provide ample daily liquidity for a typical retail investor,” he adds.

Treanor at AVI Global Trust also points to the LSE as a “home to hundreds of listed investment companies offering access to private assets spanning private equity, real estate, credit, infrastructure, renewables, as well as more esoteric private asset classes such as music rights and shipping.

“Shares in these companies can be traded like any other share, thus providing a liquid wrapper around the underlying unlisted assets.”

While investment trusts can enable investors to address the illiquidity of private assets, Douie at PM Alpha says the flip-side of being able to buy and sell whenever an investor wants is that the clearing and share prices may not necessarily represent the value of the underlying illiquid assets.

For most retail investors, investment trusts are the only route available in which to invest in private markets, says Jonathan Moyes, head of investment research at Wealth Club, a service for high net worth and experienced investors.

But he adds that other structures are starting to emerge.

One example is semi-liquid funds, a structure Moyes says will be more familiar to high net worth and sophisticated investors.

He adds: “Semi-liquid funds have similar characteristics to OEICs and unit trusts.

“Unlike their daily dealing counterparts, these open-ended funds typically offer monthly or quarterly dealing with strict net redemption limits to protect the fund investors against excess redemptions during times of market stress.”

Are private assets pricier? 

While Douie at PM Alpha says public markets have experienced a “multi-decade trend” of fees reducing more in line with passive fees, he adds that that market force has not impacted private markets.

“Mainly because the strategies are all so unique, and arcane in many ways. They’re very specialist in some cases,” he says.

Moyes at Wealth Club agrees that private market strategies come with higher costs than public market investments because of the extra work required in sourcing, analysing and managing private investments.

“Private market funds also command performance fees, or carry, typically between 12.5 per cent and 20 per cent of a fund’s net return,” he adds.

Harry Wu, a director within the private markets team at Bfinance, an investment consultancy, says performance fees in private markets are quite common, in part because most private market strategies have higher return targets, and management fees tend to be higher.

But although private equity, for example, is a relatively expensive asset class when compared to public equities, Gauld at Abrdn says he encourages people to focus on the “strong performance, which is net of fees”.

What role can private assets play in a portfolio?

Companies are increasingly staying private for longer, says Moyes, with much of the world’s growth and innovation happening outside of public markets.

“Without some exposure to private assets, a multi-asset fund manager cannot hope to provide anything other than second-rate returns for clients,” he adds.

Helen Steers, lead manager of Pantheon International Plc, agrees that the number of public companies has declined over the past two decades, while the number of privately held companies has increased.

“Many growth-oriented businesses are remaining private for longer or deciding not to list at all, which has boosted the relative attractiveness of private equity as a means to achieve a diversified portfolio, and to access fast-growing sectors and companies,” she adds.

While private markets can therefore offer investors breadth, Douie describes it as complicated and fragmented. “It really makes a difference picking between strategy A and strategy B, or manager A and manager B,” he adds.

“As a result I think private markets, more than anything else, need to be within the context of an entire portfolio; and that is only really doable through wealth management and financial advice.

“You could argue that buying multi-asset passive in the public markets has kind of disintermediated the consumer a little bit, because you don’t need advice really to pick that.

"But in private markets the impact of adding it, positive and negative, and how you add it, it is essential to do it within the context of an advised portfolio.”

Chloe Cheung is a senior features writer at FTAdviser