December 21, 2020

Why the private market is set to dominate investment

Record levels of spending will call for record levels of funding this decade. That’s a golden opportunity for the private markets – and high net worth investors.

The world is going to require unprecedented funding in the decade to come. So much, in fact, that the public markets cannot possibly meet the demand. Climate change, urbanisation, technology and big data – all of these will require solutions in the medium to long term that call for vast sums of money, not simply from the public markets but the private markets as well.

It’s an important consideration for investors intent on building a well-balanced portfolio. As Gillian Gordon, Head of Alternative Investments and Responsible Investing at JBWere, says: “If you want to have access to the whole of the market, you need to think about your portfolio being exposed to not just the public market, but also the private market.”

The public face of private assets

First, however, you need to understand the make-up of the private markets – and whether they’re a good fit for you.

Essentially, they’re those assets that aren’t easily accessible via public exchanges. Think private equity, venture capital, private real assets like infrastructure and property, and private debt. These have long been a core component of large, well-diversified institutional portfolios, both locally and globally, but are relatively scarce in the portfolios of individual investors.

That’s because they aren’t nearly as accessible as publicly traded shares and bonds. As Gordon points out, the complexities and constraints around transparency, together with the skill set you need to conduct due diligence on these investments, have tended to put off individual investors – as has the unwieldy format.

But this may be set to change. “A number of top tier global fund managers have been quite innovative and entrepreneurial in creating more understandable and accessible vehicles,” Gordon says. For example, they might choose to convert their investments to a more readily accessible Australian domiciled format, with some potential liquidity windows. That’s not easy, because the underlying investments can be highly illiquid. Yet an increasing number of funds are looking to do the same as they attempt to diversify their investor base in the face of heightened demand.

Understanding the appeal of the private market

For high net worth investors, there are a number of compelling reasons to consider the private markets, starting with the significant growth they’re enjoying. In fact, private market funds have been increasing at a much faster pace than their public counterparts for some time now, with the McKinsey Global Private Markets Review 2020 putting their growth at 170 per cent over the past decade compared with just 100 per cent for public markets.

Gordon says this trend will only intensify in the short term, off the back of extremely high levels of government spending during the pandemic. “Government debt levels are at record levels globally, so the private markets are going to be increasingly relied upon to step up and plug the gaps in public spending,” she explains.

At the same time, companies are staying private longer than ever, further accentuating this move to the private sphere. “It’s exponential growth and with that comes a lot more opportunities,” Gordon says.

Another reason to consider the private markets is performance. Private equity has often outperformed public equity on both an absolute and risk-adjusted basis over the long term, Gordon points out. Admittedly, this differential narrows over a shorter timeframe, but that may be less relevant to many investors. As Gordon notes: “The key is to consider your investment time horizon and invest in a way that is appropriate for you.”

Yet another upside relates to value creation. The private markets offer a different way of driving value in your investments, Gordon says. For instance, you have a much greater degree of control over the way a company is run compared with public companies, which must meet shareholder demands and requirements. It could be that you take a longer-term view, investing heavily in the first few years with the hope of generating returns further down the track.

Buyer beware

Of course, the private markets come with their own risks. Inevitably, you have much less data transparency around these assets compared with the public market. They also tend to be much less liquid.

This was readily apparent during the current crisis, where there was noticeably less volatility in the private markets – the natural result of their being less tradeable and more opaque.

However, again this might suit those investors with a long-term horizon. “You don’t have that same flexibility you have in the public markets to trade in and out, so you really are [by necessity] taking a much longer-term view,” Gordon says.

The JBWere factor

Nevertheless, for high net worth investors, it makes sense to approach a wealth management firm like JBWere to access these markets. “The industry has a long way to go before the average non-institutional investor can easily get access to the full spectrum of the private market,” Gordon says. “That’s where JBWere is a differentiator.”

The wealth manager can help in several ways. First, it can aggregate demand, using its size and scale, as well as its extensive client base, to amass the necessary purchasing power. As Gordon says: “Top tier global and local fund managers may often require a large cheque, or a large minimum investment, to even be interested in speaking to you.”

Second it can do the necessary due diligence. “We conduct the due diligence ourselves and write research reports,” Gordon explains. “We have direct contact with the fund manager and can gain access to their data and information to be able to analyse and assess whether it’s a suitable investment for our clients.”

Lastly, JBWere can operationally convert these investments into a more digestible format, including more bite-sized pieces, to enable clients to build well-diversified portfolios and avoid concentration risk. “For example, if the fund manager requires a cheque for $10 million, we’re able to significantly reduce the minimum denomination size to enable our JBWere clients easy access,” Gordon says.

As she notes, the whole process involves a multitude of specialists. “We have deep in-house capability across operations, legal, compliance, risk and tax, in addition to our alternative assets team. That’s important to be able to deliver real insight and access to the private markets.”

And at the end of the day, Gordon believes it’s worth it. “There’s so much innovation and change that’s derived out of the private rather than public market.” Ultimately, it’s an opportunity to invest in the future.

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