Page 48 - DIY Investor Magazine | Issue 32

GETTING IN ON THE ACT: PRIVATE MARKETS
PRIVATE MARKETS COULD BE THE NEXT BIG OPPORTUNITY FOR INVESTORS....
Private markets could be the next big opportunity for investors; in this first of a series of articles looking at private market exposure and what it brings to a portfolio, we look at private equity, potentially the highest returning area of private markets, but also the biggest risk.
As we discussed in August last year, large institutional investors have long led investing fashions. We highlighted Yale’s transformation of its Endowment portfolio from public towards private assets, as its management embraced illiquidity and risk; over 30 years, it has dramatically increased exposure to non- traditional asset classes.
Today, US listed equities account for < 10% of the portfolio; foreign and private equity, absolute return strategies, and real assets represent 90% >. We share Yale’s view that alternative assets (illiquid, private investments) offer greater opportunity to exploit market inefficiencies through active management.
YALE ENDOWMENT ASSET ALLOCATION 1990-2020
Source: Yale
It delivered different returns to standard portfolios; Yale’s Endowment reported a 40.2% investment return, net of fees, for the year ending 30/06/2021, generating $12.1bn in investment gains. FTSE World Index returned 18.9%.
This is icing on the cake for the Endowment, which has outperformed wider equity markets for decades; Admittedly, Yale embraced risk as well as illiquidity, but investors everywhere are taking notice of private assets. The board of Calpers (the US’s biggest public pension plan with $500bn) decided in 2021 on a significant change, increasing private equity by 5% to 13%, and investing 5% of assets into private debt for the first time.
The increased allocations are to be funded from public equities, which it views as ‘overheated’ (FT). The investment trust universe is a big beneficiary of investors that agree, with AUM in ‘alternatives’ rising by £11.5bn over 2021 (73% of the sector’s issuance: Numis).
The UK Government recently consulted with the pension and investment management industry to change fee caps set up to protect workplace pension scheme investors from high costs. Capped at 0.75%, many alternative asset managers are unwilling to offer products to these pension schemes.
‘THIS EXCEPTIONALLY STRONG RETURN IS ICING ON THE CAKE FOR THE ENDOWMENT, WHICH HAS OUTPERFORMED WIDER EQUITY MARKETS FOR DECADES’
Government is keen to remove barriers for schemes to access illiquid investments.
The consultation sought to determine whether a performance fee could be levied for such assets outside of the cap. In the FT, the Pensions’ Minister recognises that ‘green infrastructure, private equity and venture capital, fits well with the long-term horizons of DC [defined contribution] schemes.
Such investments have the potential to provide better returns for members as part of a balanced portfolio and help to sustain employment, our communities and the environment’.
WHAT ARE ‘PRIVATE ASSETS’ FROM AN INVESTMENT PERSPECTIVE?
We define private assets as unlisted investments; as a result, they are illiquid. With no ready market, prices/valuations are negotiated.
Part-ownership is rare, so being a controlling shareholder in such assets requires significant management expertise over and above a listed-equity manager. In capitalist economies, private assets dominate; many high street brands are unlisted or private, but are far from niche.
‘PRIVATE CAPITAL HAS ALLOWED COMPANIES TO GROW TO A GLOBAL SCALE WITHOUT HAVING TO LIST ON A STOCK EXCHANGE’
DIY Investor Magazine · Feb 2022 48