Q&A: Why should private assets have a place in private wealth portfolios?
Jack Wasserman discusses the potential upside – and risks – of an allocation to private assets.
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From AI to the energy transition or simply looking to access exposures you can’t find in public markets, there are plenty of reasons why professional investors should be considering private assets for their clients.
Equally, it is an area where they need to be aware of the risks involved. We look at the key developments in private markets investing and the practical considerations for investors at the first stages of their private markets journey.
How would you define private assets?
Private assets cover a wide range of investments but, in its simplest definition, it refers to investments that are not traded on public markets.
The main private asset classes include:
Private equity – investments in private companies; everything from small start-ups to large-scale mature businesses that remain private for longer. These are not available for everyone to trade.
Real assets, including real estate and infrastructure – from office or logistics buildings to wind farms and solar parks, these are tangible investments that can provide reliable cashflows with great inflation protection.
Debt instruments – lending directly to private companies or projects.
How has access to private markets improved for non-institutional investors?
The lines between private and public markets are starting to blur, as private investments continue to become more accessible to a wider audience. This shift is powered by innovative structures, regulatory alignment and new technologies, such as tokenisation and online platforms, which are using tech solutions to break down barriers.
As an investment opportunity-set, private assets have been around for a long time in institutional portfolios, as well as the more sophisticated family offices. This trend is growing into new areas, such as private wealth. Management consultant Bain & Company, for example, has suggested that, by 2032, around 30% of global assets under management could be in alternative investments, with a significant chunk in private assets. For its part, JP Morgan recently published a family office survey that shows a 45% average allocation to private assets.
There is no denying, however, that a wider pool of investors is now able to access private markets and, as a result, greater education is needed. Private markets are here to stay, and we expect them to play a bigger role in our investment landscape moving forward.
What is the case for and against the main private asset categories?
There is a wide breadth of investment themes available across private markets, which you can’t get in public markets. As an example, around 90% of companies in the US are private, which means there are fantastic opportunities to invest in sectors like healthcare, AI financing and the energy transition, which have a broad base across private markets.
When considering those four principal categories of private assets – private equity, private credit, real estate and infrastructure – each comes with its own set of sectors, risk profiles and return potentials. The beauty of private markets is they offer a range of potential outcomes, such as boosting returns, generating higher and more stable income and providing genuine diversification.
Private equity, for example, has historically delivered outsized returns compared with listed equities, while private credit can offer higher income streams. For their part, real assets such as infrastructure can deliver on both stronger returns and risk reduction, while giving exposure to risk premia that are hard to find in public markets, such as power-price risk. These assets can really help create a more efficient portfolio for clients.
One challenge to consider right from the start is liquidity – or rather, illiquidity. By their very nature, private assets are not traded frequently, so it is critical to approach these investments with a long-term mindset, even if some structures offer limited liquidity options.
To what extent has the introduction of open-ended evergreen (or semi-liquid) structures changed how private investors should think about private assets?
The introduction of these structures, which include the Luxembourg UCI part IIs, the European Long-Term Investment Fund (ELTIFs) and the Long-Term Asset Fund (LTAF) in the UK, is a real game-changer and the relevance of this structure for the wealth audience is undeniable.
- UCI part II is now a very popular Luxemburg fund structure that invests in all types of assets, qualifies as an alternative investment fund and can be sold to all types of investors globally (ex-US onshore).
- LTAF in the UK, initially designed with specific groups in mind (tax-exempt investors, defined contribution and defined benefit pensions and charities), since June 2023 is open to advised and discretionary retail investors. Specifically, with the launch of LTAF open-ended investment companies, we are seeing an exciting opportunity to offer access to these differentiated investment outcomes. The UK market is already familiar with private asset investments like infrastructure and private equity thanks to the success of investment trust structures. LTAFs and trusts have distinct characteristics, but we believe they are complementary in providing exposure to private assets. Overall, LTAF represents more than just a new product; it has the potential to transform investor perceptions and accessibility to private assets across diverse segments.
- ELTIF was initially created as closed-end structure, but since October 2024 new rules on redemptions and liquidity mean evergreen ELTIFs are now possible. The ELTIF 2.0 allows increased investment flexibility, offers a broader range of assets than the previous version, and reduces distribution complexity.
Evergreen, open-ended structures are becoming increasingly essential for wealth management businesses looking to include a private markets proposition in their offerings. As an example, Schroders recently announced a partnership with a European bank that had not offered private assets or alternatives to its clients (via a UCI part II) in more than a decade – and we believe the introduction of the LTAF could spark similar demand in the UK.
How justified are concerns about liquidity and valuation and how can investors guard against the associated risks?
The key concern here would be whether investors understand the characteristics of the products there are buying. Both liquidity and valuation in private assets deserve careful consideration.
By their nature, many private assets are not traded frequently, making it challenging for investors to access their capital quickly, if needed. Unlike public equities or credit, which can be sold almost instantaneously, private investments often require a longer commitment, meaning your capital could be tied up for years. That said, it is also important to consider how often people actually access their pensions or ISAs. For many, these are long-term investments where immediate capital is not required.
Valuation is another critical area of for investor due diligence. Determining the fair value of private assets can be complex, given they often lack readily-available market prices. This lack of transparency can make it difficult to assess the true value of your investment, especially during market fluctuations.
In practical terms then, how can investors guard against these risks? Here is a short checklist:
Position sizing is key: While family office average allocations tend to be around 45%, we are seeing the wealth market for suitable clients comfortable with 10% to 20% in private market illiquid and semi-liquid structures.
Diversification: By diversifying, you reduce the impact any single asset or sector may have on your overall portfolio.
Due diligence: A well-managed fund with a strong track record can help alleviate concerns around valuation and liquidity.
Liquidity management: Especially in evergreen open-ended vehicles, it is important to research how liquidity is managed as this varies across different funds.
Staying informed: Regularly monitor your investments and engage with fund managers for updates on valuations and liquidity.
While liquidity and valuation are important to consider, the long-term potential of private assets can be worthwhile. It is also useful to remember that liquidity risk comes in many forms. The top 10 companies of the S&P 500 now make up about 30% of the index, while the top 10 in the FTSE 100 account for almost 50%. This reality underscores the value of diversifying into private assets, providing exposure to a broader array of businesses and growth opportunities not available in public markets.
Institutional investors have been allocating to private assets for some years now – are retail investors ‘late to the party’?
Not at all. The dynamic we have in the market is still one of a shortage of capital versus the projects and opportunities available. This is creating an environment where both individuals and institutions can benefit from a great entry point.
While I primarily focus on infrastructure, the current market conditions could present a favourable entry point for renewable infrastructure investments. If you think of the capital needed to progress the expansion of AI or to deliver the energy transition, there are simply too many projects relative to the money we have available. Governments do not have the capital, which means returns have to incentivise private capital to deliver on these opportunities.
How does the current interest rate environment affect the outlook for different private assets?
Interest rates can certainly shape the attractiveness of an investment. Base rates impact the way we value assets and the borrowing costs of leverage, which is why it is important to pay close attention to not just the headline leverage number, but the full ‘look-through’ figure as well as the way that debt is structured – amortising debt backed by contracted cashflows versus large bullet loans with repayment/refinancing risk. Clearly, lower rates benefit yielding assets and broader valuations, but that is not necessarily a requirement.
The current interest rate environment significantly affects how we value different private assets, and it is essential to understand these dynamics to make informed investment decisions.
In private equity, while higher rates might suppress valuations, it is also important to consider that private equity firms can adapt their strategies. Some focus on the small to mid-cap end of the scale where leverage is less prominent versus the ‘mega-deals’ you see on the front pages. Moving into a more stable or even rate cutting environment would of course be beneficial for these investments, but it is not a requirement.
What are the practical considerations for professional investors and their clients thinking about private assets – for example, appropriate platforms, tax wrappers and so forth?
We are at different stages in different geographies. The big global private banks are well developed, however regional or national nuances do exist. In the UK, for example, we are at the beginning of this journey. From the conversations I am currently having, it feels that journey is picking up momentum. We are in discussions with a number of UK advice platforms and hope to onboard our first LTAF – and we expect this to increase over time as more capital follows. When you hear reports of ‘no demand for LTAFs’, it is key to remember that the first wealth LTAF was only launched in the last quarter of 2024.
The UK wealth and advice market is behind when it comes to market infrastructure development – US and European wealth and advice businesses have for a few years been using platforms that have developed the infrastructure to deliver semi-liquid and closed-ended funds – the UK is the exception rather than the rule. The DC market in the UK has also now developed platform solutions. So, it is not a matter of ‘if’ but ‘when’.
A version of this article was first published on Wealthwise.
Read our full analysis on the crucial considerations for wealth managers when allocating to private markets.
Explore how Schroders can help private investors access private markets.
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