I recently attended the Investment Week Alternative Summit in London, where dozens of CIOs and heads of fund selection from private banks and wealth management firms gathered to educate themselves on current market trends and how to invest thoughtfully in today’s market to create sustainable, long-term wealth. While many had been investing in private markets for years, others indicated a need and desire to get better informed on how private markets can benefit their clients and just how accessible these asset classes are today for individual investors. Below were the most frequently asked questions, and our accompanying perspective from within Ares Wealth Management Solutions.
1. We've seen a growing allocation to private markets from Private Wealth - where are you seeing the opportunities for investors in the asset class today?
When you have long-time private markets investors, such as ultra-high-net-worth family offices and large endowments, each with 40% plus of their portfolios allocated to private markets, I personally have little doubt that private wealth will continue to trend towards higher allocations. This is supported by the greater amounts of education and transparency available as well as friendlier fund structures that allow for lower minimums, simpler reporting, and fewer operational hurdles. You can see both the education and friendlier fund structures in the marketplace across three of the four main private market asset classes: private equity, private credit, and private real estate—with private infrastructure likely to follow in the coming years.
2. Why should investors consider secondaries markets for access to private equity?
Secondaries—buying a position in a private equity holding from a previous owner—can be a very attractive way for new and experienced private equity investors alike to gain access to the space. In particular, we believe some of the benefits include:
- Diversification: By manager, vintage year, geography and sector
- Early Cash Flow: Assets are often purchased later in their life and often are already returning capital
- Identified Assets: Helps to de-risk private equity by knowing what you're buying, and the ability to see the trajectory of assets
- Exclusive Assets: Ability to invest in exclusive funds with limited availability managed by top General Partners (“GPs”)
In particular, we believe that there is significant value and opportunity to be captured in the secondary market today where many high-quality assets are now trading, some at a significant discount to intrinsic value. This is happening because the sell-off in the public markets has left a number of large institutions overweight to private equity, which has caused them to look to the secondary markets as a way to sell down exposure and rebalance portfolio allocations. Additionally, traditional exit options for GPs can be limited in the current environment because of the challenges accessing the IPO markets or completing large-scale M&A transactions. This is pushing additional opportunities for secondary buyers to support GPs who want to extend their ownership to try to maximize their companies' value.
3. What factors should investors assess when reviewing potential private markets funds for investment?
Thankfully for fund selectors, private market returns have been somewhat more predictable —where above-average performers tend to stay above average and below average performers tend to continue underperforming for longer periods of time than in the public markets.
That said, evaluating manager performance can be tricky at times since many private market managers use IRR (internal rate of return) to quote performance, and these numbers can be manipulated through the use of clever timing and leverage. Therefore, I believe it is preferable to look at multiples on invested capital, to see how many more dollars you'd have in your pocket at the end of a given time period, which cannot be manipulated.
For example, when looking at multiples on invested capital, you will find that institutional capital-call style funds and semi-liquid perpetual funds often are more similar in returns than many investors suspect.