Discovering private markets
Seek new possibilities for your investment portfolio.
As an investor, navigating the world of private markets can seem complex. Let’s demystify the jargon, clarify the complexities, and provide you with valuable insights into this crucial aspect of the investment landscape.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The basics to private markets investing
Private markets explained
Private markets refer to the exclusive trading of securities, assets, and investment offerings that are not publicly listed on public stock exchanges (known as the public market) like Nasdaq or the London Stock Exchange. Private markets play a significant role in the global economy, offering a myriad of opportunities for informed investors. Despite their substantial impact, they often remain less understood than their public market counterparts and do come with their own set of risks.
For example, liquidity risk - unlike public markets where assets can be quickly bought or sold, private market investments often involve longer investment periods and can be harder to sell quickly. So it’s important to understand both the rewards and risks to make informed decisions when investing in private markets.
Types of private markets’ investments you can invest in
This involves investing directly into private companies that are not available on the public market (which you may know as public equity). Investors typically aim for long-term growth, hoping to profit when the company goes public or is sold. There are various strategies used to help these companies create value and make a profit, like geographic expansion, strategic acquisitions, and cost optimisation.
Also known as private credit, private debt is a broad term used to describe lending money to private companies in return for interest payments and eventual repayment of the principal. The main characteristics is that the lender is not a bank, and the loan is negotiated directly with the company which is not large enough to access public financing. Often these companies are known as ‘middle market’.
This could involve residential, commercial, or industrial properties. Investments could offer income through rent and potential appreciation of property value.
Risk: Investments in real estate securities (including securities listed by Real Estate Investment Trusts (REITs) can be affected by the general performance of stock markets and the property sector. In particular, changing interest rates can affect the value of properties in which a property company invests. Investing in real estate securities is not equivalent to investing directly in real estate and the performance of real estate securities may be more heavily dependent on the general performance of stock markets.
Investments in physical assets like roads, bridges, or renewable energy installations. These could offer stable, long-term cash flows.
Risk: Investment in securities and instruments of infrastructure companies can be affected by the general performance of the stock market and the infrastructure sector. In particular, adverse economic or regulatory occurrences including high interest costs in connection with capital construction programmes, high leverage, changes in and/or costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors can affect the value of infrastructure securities. Investing in infrastructure securities is not equivalent to investing directly in infrastructure and the performance of these securities may be more heavily dependent on the general performance of stock markets.
The private markets’ benefits investors care about right now
Private markets investing, and all the strategies each asset class can leverage, usually come with higher fees, longer investment term commitments and higher risks like the lack of liquidity. Remember it’s important to understand both the benefits and risks to help you make informed decisions.
Potential diversification
Investing in private markets means putting your money into things that aren’t easily bought and sold on public stock exchanges – this means they are less liquid than other asset classes. These investments often have risks that don’t move in the same direction as regular stocks or bonds you can buy publicly. This means they can help spread out the risk in your investment portfolio so, adding private markets investments could mitigate the overall risk your investment is exposed to.
Risk: Diversification and asset allocation may not fully protect you from market risk.
Seeks higher stable income
Private markets investments have the potential to deliver higher long-term stable cash throughout a varied market cycle.
For example, public bonds are issued from the government or companies when they need capital, and investors buy these bonds in exchange for fixed returns in the form of fixed interest payments. Whereas private credit investing leverages a wide range of strategies throughout market cycles, that aren’t available in public markets, and therefore could lead to investors potentially achieving higher returns compared to liquid public bonds. A popular strategy in private credit – direct lending, typically has low default rates. This is largely due to loan structuring, where private lenders can put in place mechanisms around the company’s assets for example, to ensure investors are protected as much as possible from default risk. Loans may be structured as floating rates which provides some protection against rising rates – as interest rates increase the interest the business pays increases accordingly. The interest can provide a reliable income stream. Other strategies could be opportunistic credit – often deemed as mispriced investments where investors aim to generate higher returns, or distressed lending – where investors can target credit to companies that are impacted by special events.
Inflation mitigation
This involves investing in things that hold their value even when prices of goods and services go up, which can be a typical feature of real assets. Real assets are physical things like real estate, and they tend to increase in value over time, keeping pace with or even outpacing inflation.
For example, imagine a toll road. When inflation goes up, the cost of maintaining the roads increases and so the tolls people pay to use the road also increases. The more prices rise, the more money the toll road makes to cover these costs. This helps protect against the effects of inflation as the road’s income grows along with rising prices.
Enhanced potential returns
In addition to private markets’ diversifying nature, they also offer potential opportunities that aren’t available in public markets. 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. Private markets investments could be more flexible and allow for strategies that aim to grow wealth over the long-term, and by adding these potential opportunities to your portfolio, you could potentially earn higher returns while still spreading out risk through diversification.
Greater access to private markets
Historically private markets’ investments have only been available to institutional investors, but with Europe’s investment vehicle of choice, the European Long-Term Investment Fund (ELTIF), this has changed. Due to flexible features like lower investment minimums, ELTIFs have allowed new individual investors access to private assets and enjoy their potential benefits.
Similarly, the UK have a new regulated vehicle, Long-Term Asset Fund (LTAF), designed to overcome the historical challenges of implementing alternatives in your investment portfolio.
If you want to learn more about ELTIFs or private markets, talk to your financial advisor.
