The opportunity in private assets

As opportunities increase for ordinary investors to access private markets, people are showing interest

For many years, private assets were an investment only open to institutional investors such as pension funds and the very wealthy. That is changing — and people who responded to the Global Investor Study 2023 are enthusiastic. They see private assets as a way of boosting performance, reducing risk, and improving sustainability.

People were told that private assets are investments that are typically not publicly listed and traded. They were given examples such as private equity, real estate, infrastructure and renewable energy, and private debt (lending direct to companies, not using bond markets.)

Despite the difficulties in some countries in investing in private assets, there are clear preferences for investment, indicating that people have been paying attention to this type of investment. The top choice: 30% most wanted to invest in private equity, which includes venture capital and investing in growth companies. People who rate their investment knowledge as expert are particularly keen on private equity, with 46% saying they most want to invest there.

Which private assets are people most interested in?

People's top choice of private asset if they could invest

Unlike shares traded on a stock exchange, private assets can take a long time to sell. There may be less frequent updates about performance. These are among the reasons why regulators have traditionally tried to keep them away from private investors.

However, changes to regulations and new ways to give access to private assets through indirect methods mean they are becoming increasingly accessible to all types of investors. The survey indicates there is little chance people will immediately overinvest, not least because they are aware of their limited experience, cited by 64% of people.

Perceptions around transparency, inexperience and illiquidity are holding back investment

Perceived barriers to investing in private assets

People appear to have understood the investment advantages that private assets can bring. Some 56% said they would invest to improve portfolio performance — one of the reasons why private assets have proved so popular with large investors such as insurers and endowments. And 40% said they were attracted on the grounds of sustainability or impact; these may be people who want to directly invest in wind turbines or other opportunities created by the global shift to sustainability. Overall, the picture that emerges is that people seem to have been taking notice of private assets even while they have been unable to invest.

People think private assets can boost performance and diversification --- and also improve sustainability

Reasons why people would invest in private assets

There are challenges, though. Many of the companies that offer private asset investments are not household names — hardly surprising as they haven’t been able to sell to households. But again, people seem to understand key factors that would help them select an appropriate provider. For instance, 55% of people rated fees as something to watch.

For private assets, people care most about track record, reputation and costs

Top factors people would consider before investing in private assets

What is the correct proportion of investments that should be in private assets? It is impossible to say — this figure varies for each investor based on attitude to risk, time horizon, and the opportunities available under local regulation. But with this caveat, the figures given as the percentage respondents would consider allocating appear quite reasonable, averaging 16.4%. A small number, 10%, say they would consider allocating more than 30%.

However, there are some misconceptions. Some 28% expect to hold their private assets investments for a year or even less, which most investment professionals would consider too brief as private assets are illiquid; they can’t be bought and sold as quickly as shares (although there are some important exceptions). Indeed, investment theory says that one reason why returns from private assets should be higher is that investors are being “compensated” for the illiquidity, known as an “illiquidity premium”. However, it should be noted that people in the US represented a disproportionate share of those with short time horizons, and in this market there are ways of busily trading real estate and some other investments that look a lot like private assets.

In contrast, around a quarter said they would expect to hold a private asset investment for five years or more. This is the kind of timeframe in which private assets typically excel, maximising the performance from the “illiquidity premium”. Even among people who described their level of investment knowledge as beginner, 22% said they expected to hold private assets for five years or more.

Some people have an unrealistically short time horizon for private assets

Length of time people expect to hold a private asset investment

Many people also appear to understand the path towards private asset investment, which in most countries is via an adviser who will check that such an investment is suitable. This is in contrast with public investments such as stocks, which are easily traded online with no checks other than funds being available. Those who rate their investment knowledge as expert are more likely to go to an adviser than those who rate themselves as beginners (46% vs. 41%).

16.4%
How much of their portfolio people would consider allocating to private assets
23.1%
Proportion that expert investors* would consider allocating to private assets
*Respondents rated their own level of investment knowledge
46%
think they can buy private assets using a financial adviser

Overall, the picture is encouraging. Sure, some people by their own admission need to learn more about private assets. But this shows a level of self-awareness and caution. Overall, as private assets become more available to people, there appears to be an understanding of both the challenges and opportunities of this type of investment.

"The range of options to access private markets is widening, and smaller investors are taking note. They’re looking for every available tool to achieve their desired outcomes, and private assets represent a significant number of return drivers. We believe this is a hugely positive development, and the case for including a private asset allocation – where appropriate – is arguably stronger than ever."

Dr. Nils Rode

Chief Investment Officer, Schroders Capital

Local overview

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