Investing in private markets  

  • Author
    Michael Butler
    Private Markets Investment Lead
  • Author
    Deb Wardle
    Alternatives Investment Lead
May 1, 2023

Private markets offer diversification away from listed markets and investors have the potential to benefit from risk-adjusted returns, an illiquidity premium and potential for greater protection from market shocks.

Private markets are a rapidly growing and diverse set of asset classes outside of listed equities and bonds that may provide multiple benefits to your portfolio.

Accessing private markets requires patience and expertise, as well as a long-term strategy. Understanding the options available and how they can complement each other, alongside your other investments will help you construct a robust portfolio, helping you to meet your objectives. There are several strategies within private markets, each of which is a broad and varied asset class in its own right.

  • Private equity
    Adding a private equity allocation to your portfolio could open up a number of new investment opportunities. From large buyouts of established firms to venture capital deals supporting innovative start-up companies and small businesses, there presents great potential. Allocating to co-investments and secondaries is also gaining significant momentum.
  • Private debt
    Direct lending and other types of private debt can provide investors with the opportunity to allocate capital to privately owned mid-size companies in the form of loans. These loans can help earn incremental yield away from traditional fixed income investments and are typically backed by senior claims on company cash flows or assets, helping to give the lender more security.
  • Real estate
    Bricks-and-mortar assets, such as commercial and residential buildings, have a long lifespan and may provide inflation protection through rental increases. Property assets have the potential to generate higher returns than fixed-income assets, at lower volatility than equities, demonstrating the sector’s importance as a portfolio diversifier. Investors can also capitalize on changes in population demographics, urbanization and the digital economy through thematic real estate strategies.
  • Infrastructure
    Infrastructure assets provide essential services that underpin the structure of an economy or society. As an asset class, it provides investors with stable, relatively uncorrelated, often inflation-protected returns. It also enables investors to allocate capital to the energy transition, digital infrastructure and other transformative trends. Infrastructure investing can also provide strong ESG-alignment within portfolios.

Building a private markets portfolio

Adding a private markets allocation within your portfolio may provide you with diversification and return benefits. This is a very broad and often complex universe of asset classes, funds, and strategies, requiring a patient and well-informed approach. If it is executed well, however, the results may be rewarding.

Accessing private markets opportunities

We believe the best way to capture private markets opportunities is by working with highly-rated asset managers. To access these asset managers requires strong relationships, patience and flexibility with capital.

Our scale, global reach and long history in this area of investments gives us an advantage when connecting you with the most appropriate opportunities for your portfolio. There are several elements you need to be sure of before you embark on building out your private markets portfolio.

You will need to identify the best asset managers and strategies to suit your needs. This requires detailed research, and a robust due diligence process to help ensure each manager meets your requirements. Our global research team can provide detailed insight to high-quality asset managers across all asset classes.

Ensuring asset managers are aligned with your ESG objectives is crucial. Increasingly, private market asset managers are embedding ESG factors into their investment processes – and in some asset classes, such as infrastructure, you can gain direct access to investments that are having a real-world positive impact while also potentially generating a financial return.

Most private markets asset classes are illiquid, meaning it is very difficult to efficiently trade in and out. This requires you to have a long-term strategy for allocating over several years. 

Once you have committed to a particular fund, you may need to provide capital at short notice when your manager identifies an appropriate investment opportunity. This means it is vital that you have a well-designed capital deployment and cash flow management plan. We can help you construct a budget to ensure flexibility and avoid holding large amounts of cash.

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            Contributor(s)
            Michael Butler
            Deb Wardle

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            See our Important Notices

            Private funds are for sophisticated investors only who are accredited investors or qualified purchasers. Funds of private capital funds are speculative and involve a high degree of risk. Private capital fund managers have total authority over the private capital funds. The use of a single advisor applying similar strategies could mean lack of diversification and, consequentially, higher risk. Funds of private capital funds are not liquid and require investors to commit to funding capital calls over a period of several years; any default on a capital call may result in substantial penalties and/or legal action. An investor could lose all or a substantial amount of his or her investment. There are restrictions on transferring interests in private capital funds. Funds of private capital funds’ fees and expenses may offset private capital funds’ profits. Funds of private capital funds are not required to provide periodic pricing or valuation information to investors. Funds of private capital funds may involve complex tax structures and delays in distributing important tax information. Funds of private capital funds are not subject to the same regulatory requirements as mutual funds. Fund offering may only be made through a Private Placement Memorandum (PPM).