Perspective - Thought Leadership

Sink or swim – how less liquid assets could buoy portfolio returns

With public equity markets trading close to all-time highs and low yields available from bonds, interest in private assets like infrastructure and private equity has risen.

14/05/2019

Tim Boole

Head of Product Management, Schroder Adveq Group

In a climate of lower expected returns, both retail and institutional investors are asking where they can generate the performance needed from their portfolios.

With public equity markets trading close to all-time highs and low yields available from bonds, many are exploring less liquid alternatives to get the returns they require. Consequently, investments such as infrastructure or private equity have all seen strong growth in interest.

Yet even in private assets, a record year for fund raising in 2017 has led to questions on whether historic returns are sustainable.

Tim Boole, Head of Product Management at Schroder Adveq, advises that investors worried about this should remember the differences between public and private markets.

“Investors must keep uppermost in their minds that private assets are long-term commitments, meaning they are almost certain to experience at least one complete business cycle. Investment decisions should be considered with due care. Selecting investments that align with long-term trends in the economy are usually best performing.”

Why diversification is key in private assets

Despite the appeal of private assets though, there are also difficulties and challenges to investing in the asset class, not to mention significant risks. There is a lot of dispersion in private markets. While the best managers do very well, the worst can provide investors with quite a dismal experience.

Heeding this warning, what should investors avoid doing and where within private assets offers the best returns going forward? The key, according to Tim, is to avoid following the herd and instead look for where the future opportunities are.

“For those investors who are relatively new to private asset investing, another important lesson is to target portfolio diversification, both in the traditional sense - such as by sector and region - but also by vintage. The latter is a particular characteristic of closed ended funds whereby investments at a different period of the investment cycle are included in the portfolio. This helps combine investments that are already cash flow positive into a fund that is in its launch phase. Investments at a later point in their investment cycle also tend to be more stable. 

“Within private equity there are some areas that have attracted huge amounts of capital and other areas where the growth has hardly changed. For example, huge amounts have been going into the large and mega buy out funds and late stage venture capital finance, whereas capital into small and medium buy-out funds and early stage venture capital has changed much less in the past 20 years1.

Time is on your side

Tim believes that patience and attention to detail are often overlooked in the rush to commit capital to markets. Given the longer market tenure of private assets, investors can afford to dig deeper into new opportunities.

“Investors want to put a lot of money to work and as a result are chasing the big opportunities. But if you are nimble and can work with those who specialise in smaller buy-outs or in venture capital, the returns may be more attractive. This is because the gap between the valuations of buy-outs at the larger end and those at the smaller end have never been as wide as they are today.

“Given that the main access route to investing in private assets is currently via limited partnership structures or closed-ended funds, at present it is a challenge for intermediaries to get easy access to the asset class.

“One of the things we expect to see a lot over the next five to 10 years are intermediary investors being offered more options for private asset investing. This is a particular focus of Schroders and described as the “democratisation of private assets”. One of the things Schroders is working on this year is creating new products for the intermediary market, which are open-ended with periodic liquidity to provide underlying exposure to the underlying private assets.”

A broad offering

The complexity of the numerous instruments within private assets, as well as the extended time commitment, can make choosing a partner for the investment journey a challenging task. Tim suggests that when selecting a manager for the job, investors consider the length and breadth of their experience before taking the plunge.

“Schroders is more often associated with public market investing but has a far more extensive history and platform for private market investing than many realise. In 1971 it set up a real estate business, which at the end of June 2018 housed just under $20 billion of assets. In 2017 it acquired the Swiss private equity business Adveq which in itself has over 20 years of private equity investing experience and today runs close to $10 billion. Schroders Infrastructure Finance team have executed on 46 transactions in just three years. Schroders Insurance Linked Business (“ILS”) is run by Dirk Lohmann, an early pioneer in the field of insurance securitisation, who placed the world’s first non-life insurance securitization (KOVER) in 1993/94.

“With these capabilities, Schroders is well placed to deliver within all areas in private assets. It has a very broad offering, meaning there is a good perspective on where the opportunities are and can act accordingly. It is specialists in all areas, applying the same levels of thought, care and diligence to our private asset products as we do to our public equity offerings.

Given that investments into private assets are often a 10 to 15 year commitment, investors also need to know their manager will be around for that amount of time. Schroders has been around for 200 years, has the backing of the Schroder family and adopts a long-term time horizon.”


1. Source: Preqin, Pitchbook, Zero2IPO, Schroder Adveq 2018. Late stage/growth capital includes 50% of SoftBank Vision Fund and includes investment activity from non-traditional sources of capital (e.g. corporate investors).