The case for private assets

Private assets offer low return correlation with listed assets and can work to reduce overall portfolio volatility. Chris Davis | Executive Director | PKF Wealth

Private assets have been an attractive area of investing for many years for the big end of town, ultra-high net worth families, institutions, and large super funds. However, these investments have been unavailable to smaller investors until very recently. “Private assets” is a term that covers many investments that are typically not traded on publicly listed markets and are therefore less liquid than their listed counterparts.

The trade-off that investors must accept is that for the loss of immediate liquidity and necessary longer investment horizons needed when investing in private assets, is that these investments can deliver the illiquidity return premium. This is a return factor that is present in
illiquid private asset markets, where the returns are greater in private assets than available from investing in publicly listed and traded assets. Private assets also offer low return correlation with listed assets and can work to reduce overall portfolio volatility.

Categories of private assets:

• Private equity: Access to larger private companies allow investors to participate actively in private equity, benefiting from strategic planning and concentrated ownership.
• Private debt/credit: These opportunities in debt markets provide fixed-income options within the private sphere.
• Direct property and infrastructure: Property unit trusts provide exposure to tangible assets, offering stability and potential for both income and long-term growth, but with limited liquidity. 

Private equity vs. public equity:

Private equity stands out with its unique characteristics:

• Private information shared under NDA.
• Active ownership positions where there is a greater alignment of interest between owners and management.
• Concentrated ownership structure.
• Multi-year strategic planning.
• Ability to attract talent through equity participation. 

In contrast, public equity operates within the confines of public information, passive shareholders, broad ownership, quarterly reporting cycles, and traditional incentive structures.

Issues to be considered:

• Low or no liquidity (takes longer to get access to your invested money).

• Longer holding horizon (often with a minimum lock up period).
• Less consumer protection as they are only available to wholesale investor’s and may not have AFCA protection.

The potential opportunity set: 

Over recent years the number of listed companies in major markets is in decline, reducing the investment opportunity set for investors that can only access listed markets. For example, in the USA the number of public companies has shrunk from 7,800 in 2000 to approximately
4,800 in 2020, a decline of 38%! To further illustrate this point and the opportunity set in unlisted companies, there are 7.5 times more US Private Companies than there are Public
Companies with revenues over $100m (as of September 2021).

While private asset investments can be lucrative, suitability must be assessed for each client. Factors such as low or no liquidity, a longer holding horizon, little to no income, and incompatibility with managed portfolios should be carefully considered. Blending managers, setting portfolio use limits, such as a maximum weight of 5% to each illiquid fund, and 20% to private assets, can ensure a balanced and risk-aware approach.

In conclusion, private asset investment opportunities present a compelling option for investors seeking diversification, stable returns, and reduced volatility. However, careful consideration of suitability, blending strategies, and adherence to portfolio use limitations are crucial for a well-balanced investment approach. As the landscape of private assets continues to evolve, staying informed and adapting to market dynamics will be key for investors and financial professionals alike. 

To investigate this opportunity please contact your PKF Wealth financial adviser on [email protected].