Investing in private markets  

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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 capitalise on changes in population demographics, urbanisation 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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    Private markets asset classes in detail

    Our dedicated professional teams can help you explore the different strategies within private markets and build a portfolio we believe is suited to your risk and return requirements and other objectives.

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      Contributor(s)
      Michael Butler
      Deb Wardle