
What are the benefits of private assets and the best way to access them
Demand for private assets is not a new trend. The search for uncorrelated investments and enhanced returns has been a quest for many investors who had their fingers burnt during the Global Financial Crisis of 2008.
More than fifteen years later and exposure has risen steadily, as has the investable universe available to those investors. Gone are the days when private assets consisted solely of private equity and real assets, with areas like infrastructure and private debt now coming to the fore.
The investor base has also evolved. Liquidity issues and complex structures in this market have traditionally made it the realm of the institutional investor – but a world of low rates, sharp bouts of volatility and concerns about the correlation in performance of bonds and equities in times of stress has made private assets more attractive to the likes of high net worth and mass affluent investors.
However, uptake could’ve been faster for this cohort – with numerous barriers to entry stemming the tide of retail assets. The most obvious of these is the “liquidity mismatch” between these types of assets and the need for shorter time horizons and greater liquidity from retail investors. This has been highlighted in the property market in recent years – with forced sales of real estate assets resulting in a significant loss in value.
Other challenges include regulation around private assets, fee structures, financial transparency and technology. But things are changing to make private assets more attractive for individual investors.
What are the benefits of private assets?
More than 80% of the global economy is driven by privately held companies, yet retail investors have largely been left out. To put it into perspective, the combined capital of private wealth is equal to that of all pension and institutional money worldwide.
Asset diversification
Investing in private markets means putting your money into things which are not bought and sold on the public stock exchange, meaning they are less liquid than other assets. They also often perform slightly differently to traditional equities and bonds. This offers greater asset diversification, which has grown in importance in recent years.
If you put “60/40 investment portfolio” into any internet search engine, you’ll get a load of headlines asking whether the traditional way of investing is dead. There has historically been a negative correlation between equities (60%) and bonds (40%), meaning in falling equity markets investors could usually find solace in the bond market. But more recently (particularly in 2022) both equities and bonds simultaneously suffered, prompting many to question how appropriate the 60/40 allocation now is for an investor. Private markets can provide diversification benefits to portfolios, helping to mitigate some of the risks associated with traditional asset classes.
Income diversification
Income diversification is also a key benefit of private assets. For instance, private equity may enhance returns, but may not prioritise income or diversification. Real assets, like real estate and infrastructure, on the other hand, exhibit low or negative correlation to a 60/40 portfolio and often provide stable income and inflation protection. These were particularly useful strategies during the era of Quantitative Easing, when interest rates were low – meaning investors had to find alternative income streams.
Enhanced return potential
Inflation and interest rate uncertainty can erode the real value of investments. Importantly, private markets are not as susceptible to pricing pressures as publicly traded portfolios. For instance, private real estate can often perform well during inflationary periods (as prices rise, so do property values and rental income – offering an inflation hedge).
Investing in private companies through private equity strategies can sometimes lead to higher profits than investing in stocks or bonds that are traded on the stock exchange. This enhanced return potential is supported by figures from Schroders between 2013-2023, which show that the likes of infrastructure, private debt and private equity have all outperformed the traditional 60/40 portfolio in terms of historic average annual returns*.
What are the risks associated with private assets?
Whilst investment in private assets can offer the potential of higher than average returns, it also involves a corresponding higher degree of risk. Private assets are also more illiquid than other types of investments and harder to sell. Investors may well not be able to realise their investment prior to the relevant exit dates.
How best to access private markets
This is why we believe investing in a fund manager is the best way to get exposure to these assets. One of the best way is through an investment trust, which has a closed-ended structure. Imagine a club with a fixed number of memberships. Investment trusts work in a similar way. They are ‘closed-ended,’ meaning there’s a limited number of shares available. This unique structure allows them to delve into specialised and less liquid market areas alongside more traditional equity or bond holdings that other investment options might find challenging.
A good example would be the Scottish Mortgage Investment Trust, where fund managers Tom Slater and Lawrence Burns take a high-conviction approach and can invest up to 30% of the portfolio in unlisted companies.
In a recent podcast with Hamish Maxwell, investment specialist on Scottish Mortgage, he explained that the benefits of blending public and private assets was one of the trust’s key strengths. He also discussed the growth of private assets and the sort of companies they target.
He says: “The relevance of private companies has been increasing over the past couple of decades. The average age of a company in America going to IPO (Initial Public Offering) in 2000 was eight years old. Today it’s 12 years old. And back in the year 2000, the amount of value in late stage private markets was around $10 billion. Now it’s near $2 trillion. So there’s a lot of value sticking in later stage private companies, and you can go into the reasons for that. Certain types of companies need less capital these days, for example, or less access to capital markets.
“So by having an arbitrary distinction at the point of IPO, we would basically be preventing ourselves from owning some of these fantastic growth companies. In addition to that, we learn a lot from our private companies. It tells us about the type of exciting disruption that’s coming down the line. So not only are we getting exposure to the likes of SpaceX or Bike Dance, which are doing really well in terms of growth. We’re also learning a lot about the future of economies and societies.”
With its differentiated approach of investing in both private and public equities, the Schroder British Opportunities Trust (SBOT) was one the few products launched in response to the Covid-19 pandemic – as it sought to back a number of exciting opportunities in the UK small and mid-cap market.
Investing in roughly 30-50 holdings, SBOT targets two specific businesses – these are ‘high growth’ firms which are set to benefit from the rapid change in corporate and consumer behaviour; and ‘mispriced-growth’ companies which offer products and services with long-term structural growth drivers.
There are also opportunities to invest in those closed-ended trusts through multi-asset funds. A good example here would be the IFSL Wise Multi-Asset Growth fund. Manager Vincent Ropers says the fund has had an average allocation of 15% to private equity in the past 15 years – with the asset class being one of the top three contributors to fund performance in that period. The fund also has exposure to infrastructure and property through investment trusts.
Others to consider with exposure to closed-ended private assets include BNY Multi-Asset Income fund (which has exposure to the likes of infrastructure and property in its portfolio) and VT Momentum Diversified Income fund, which also has exposure to private assets through the specialist sleeve of the portfolio.
*Source: Schroders – Allocating to private assets: An essential guide