The recent end to history’s longest-ever economic expansion has created uncertainty in stock markets and beyond. The need for returns, a regular income and diversification have brought private assets to the forefront, and a major shift is taking place.
The democratization of private assets, such as private equity or real estate, is accelerating amongst investors globally. Regulations, technology and product innovation are supporting the development of new funds designed around private investor needs.
New investment solutions, like the European Long Term Investment Fund (ELTIF), are being developed to unlock access.
European Long-Term Investment Funds, or ELTIFs, are a type of collective investment framework allowing investors to put money into companies and projects that need long-term capital. They are designed to increase the amount of non-bank finance available for companies investing in the real economy of the European Union.
At least 70% must be invested in unlisted opportunities needing long term capital such as small and medium sized companies or infrastructure projects.
To get the most out of the investments in these very complex markets, it’s crucial to rely on a trustworthy asset manager with a strong track record.
Providing access to private markets investments to a wider audience thanks to low minimum investment thresholds.
Actively engaging with private companies gives the opportunity to promote more sustainable business practices and behaviours.
Investing in unlisted companies and projects that are not accessible through public markets provides diversification benefits.
ELTIFs provide investors with attractive returns from complex investment opportunities by deploying appropriate skills.
ELTIFs can be offered only by an authorised manager under the EU’s Alternative Investment Fund Managers Directive (AIFMD) and is subject to its rules
It could help in meeting sustainability investment goals - i.e. SFDR Art. 8* ELTIF.
*An Article 8 Fund under SFDR is defined as “a Fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices”.
Only a small part of the portfolio should be invested in an ELTIF.
At its core Private Equity just means investing in companies that are not listed on the stock market. It may help diversify portfolio’s supporting entrepreneurs and family owned business.
Listed companies are only the tip of the economic iceberg. Private equity allows access to different parts of the economic ecosystem than public markets do.
Value is created through business transformation and by exploiting pricing inefficiencies observed in mainly small and medium sized companies that are sourced from families and entrepreneurs (e.g. in Europe, over 60% of deals in small buyouts are with families).
Complexity premium is the new illiquidity premium
Illiquidity is an active choice by investors and offers the opportunity to access the benefits of private markets. Returns are generated by the convergence of a unique situation or opportunity and a corresponding skillset which gives rise to a complexity premium.
Long term outlook
A long term objective allows for strategic change and growth without the pressure of quarterly earnings reporting.
Actively engaging with private companies gives the opportunity to promote more sustainable business practices and behaviours. Thriving small and medium size enterprises are beneficial to the long term wellbeing of our society.
Schroders Capital is the private markets investment division of Schroders, the global asset management group.
Schroders Capital is a business built to provide investors with access to a broad range of private asset investment opportunities, portfolio building blocks and customised private asset strategies. Its team has been operating in private markets for over two decades, focusing on delivering best-in-class, risk-adjusted returns and executing investments through a combination of direct investment capabilities and broader solutions in all private market asset classes, through co-mingled funds and customised private asset mandates.
The team aims to achieve sustainable returns through a rigorous approach and in alignment with a culture characterised by performance, collaboration and integrity.
Schroders Capital offers a diversified range of investment strategies, including real estate, private equity, infrastructure, securitised products and asset-based finance, private debt, insurance-linked securities and impact.
Richard Damming, Co-Head of Private Equity Investments Europe, describes Schroders Capital platform.
Richard Damming, Co-Head of Private Equity Investments Europe, explains how co-investments works.
While private equity investments offer potentially significant capital returns, funds and companies may face business and financial uncertainties. There can be no assurance that their use of the financing will be profitable to them or to any Fund. lnvesting in private equity and venture capital funds and unlisted companies entails a higher risk than investing in companies listed on a recognised stock exchange or on other regulated markets. This is in particular because of the following major risk factors:
Investment risk: private equity investments typically display uncertainties which do not exist to the same extent in other investments (e.g. listed securities). Private equity investments may be in entities which have only existed for a short time, which have little business experience, whose products do not have an established market, or which are faced with restructuring etc. Any forecast of future growth in value may therefore often be encumbered with greater uncertainties than is the case with many other investments.
Capital loss risk: the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Market risk: market risk is the risk of investment losses due to negative effects of the capital markets on the overall performance of the fund.
Credit risk: the fund will have an investor commitment/ draw-down funding model which exposes the investment vehicle to the credit risk of its investors. lf an investor fails to comply with a drawdown notice, the investment vehicle may be unable to pay its obligations when due.
Liquidity risk: given the illiquid nature of private equity investments, investing in private equity are subject to asset liquidity risk. This liquidity risk is a result of the likelihood that a loss from current net asset value would be realised if an asset in the fund needed to be sold quickly in the secondary market to meet the obligations of the fund.
Currency risk: investments in companies or instruments which are denominated in currencies other than the fund’s respective currency expose the fund to the risk of losses in case foreign currencies depreciate.
Operational risk: operational risks are risks of loss resulting from inadequate or failed internal processes, people and systems, or from external events conducted by Schroders Capital and the managers the fund will invest alongside.
Valuation risk: it may be difficult to find appropriate pricing references in respect of unlisted investments. This difficulty may have an impact on the valuation of the portfolio of investments of a SubFund. Certain investments are valued on the basis of estimated prices and therefore subject to potentially greater pricing uncertainties than listed securities.
Performance risk: investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro-economic environment, investment objectives may become more difficult to achieve.
Emerging markets and frontier risk: emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.