This article has been translated from German.
Returns outside the stock market – Alternative investments open up for private investors
Professional investors are looking to the boom in private markets; and are attracting more and more retail investors. Access is set to become even easier in the future.
By Peter Köhler
Frankfurt - Asset managers such as Swiss bank UBS, banking house Pictet or Goldman Sachs Asset Management have increasingly been directing wealthy customers towards alternative investments. Private investors and family offices (wealthy families’ portfolio management offices) are playing an ever-greater role in the market. Until now, however, it has been dominated by institutional investors such as employee benefit schemes and pension funds.
This trend emerged from the US, but European and Asian markets are also experiencing dynamic growth. Hartley Rogers, Chairman of investment firm Hamilton Lane, notes: “Initially, foundations in the US achieved high returns with the growth being spearheaded by Yale University. Today there area broad spectrum of ‘private markets strategies’. ”He notes that these include venture capital, private equity, private debt funds and infrastructure, or private real estate. “In tandem with this, a large secondary market has developed for alternative assets, allowing for active portfolio construction and liquidity management”, explains Rogers.
The head of the investment firm says: “Democratisation means expanding access for wealthy individuals. Liquid assets should be around EUR 5m-10min order to be able to invest in our Global Private Assets Fund with a minimum investment of EUR125,000, for example. Rogers believes that in the future, the trend will be towards smaller sums of perhaps EUR5,000-10,000. Tokenisation plays an important role here. This borrows from a concept in the crypto world. There, start-ups and stock exchange operators work to split assets into smaller components, thereby making them tradable. “We have taken a stake in ADDX in Singapore. With its mobile-phone-based blockchain technology, the platform allows customers to access private markets from as little as USD10,000.This will be the future for the private markets sector”, believes the head of Hamilton Lane.
Private debt funds can protect against inflation
According to analyst group Preqin, assets under management in private markets will almost double worldwide by 2027 to USD18.3 billion compared with 2021. Demand from private investors will be the growth driver here.
Global Funding for Private Markets
Percentage by asset class
Dwight Scott, Global Head of Blackstone Credit, says: “The high level of volatility for shares and pensions makes private markets even more attractive. There is less fluctuation here and growth is steadier. ”Private debt funds are in particular demand, he says. According to Preqin, they will grow at annual rates of at least ten percent.
“Private debt funds are designed to provide a strong defensive instrument, particularly during downturns. Furthermore the products carry variable interest, which can offer protection against rising inflation”, adds Scott.
The 60/40asset distribution rule for shares and bonds no longer works, he believes. He says that investors would have felt this in recent months, if not before. Private debt funds are actively managed. This is not the case with passive index funds (ETFs), adds Jurij Puth, Head of European Origination at Blackstone Credit, describing the advantages over stock investments. Experts estimate that the long-term return for private debt funds is seven to eight percent.
Family offices generate high returns
The main reason for the boom in private markets is the revenues that can be generated. In the past, downturns have always offered entry opportunities. Richard Hope, Head of EMEA at Hamilton Lane, says: “The historical data over nearly 40 years shows that in almost every year the private markets have demonstrated an excess return over public stock exchanges. This also applies to every conceivable economic cycle. ”During periods of sharp stock market price losses, he advises investors to stay calm and remain engaged in the private markets. “For example, our data shows that –when the S&P 500fell by more than five percent–the average three-year excess return was almost eight percent or 793 basis points. And the premium for the private markets increases the longer the timescale one uses to run a comparison”, adds Hope.
Hamilton Lane invested between 35 and 40 billion dollars in the industry in 2021.Of this figure, 25 to 30 billion went towards large and medium-sized buy-out funds, venture capital funds, private credit funds and real estate / real assets funds. The company invested the remainder directly into transactions. The very first wave of investments in private markets came from pension funds, followed by sovereign wealth funds, for instance from the Middle East. Today, everyone is looking towards family offices and high-net-worth individuals (the wealthy). In countries such as Sweden and Germany, larger family offices such as the Wallenbergs or the Quandts have already invested in private markets for some time. Smaller family offices followed. Looking towards the future, Rogers believes that the “democratisation” of private markets for small investors will be the most important trend in the years ahead. “Major market players are looking to offer products that are similar to today’s mutual funds for retail investors”, says Rogers.
It is becoming harder to collect new finance for funds
Up to now, private investors in Germany have been able to invest e.g. in shares from private equity houses such as EQT or KKR. Quoted private equity shares are currently listed with large price discounts against the value of their investments, perhaps because investors anticipate a recession. They therefore offer an opportunity to enter.
This emerges from the listed private equity barometer of Zurich research house LPX, which is published each quarter. As of the end of September 2022, the discount was at least one third when measured against the LPX50 NAV Index. This was the second-highest discount measured in the last ten years. This index maps listed private equity companies.
Funds of funds such as RWB or Astorius also offer access to private equity. The same applies to virtual platforms such as Moonfare. Hamilton Lane offers the Global Private Assets Fund for experienced private investors.
Needless to say, the current turmoil on the financial markets will also affect the private markets. However, Rogers from Hamilton Lane believes that overstatements from previous years also need to be corrected. He says that fundraising the collection of new finance for funds is becoming more difficult in the current crisis.
He believes that the funds would tend to need twelve to eighteen months again before the subscription would be closed. “Generally speaking the fund managers can reduce their engagements, extend them over a longer period of time, or suspend them ;we will see all three strategies. In recent years there was too much pressure in the market to add new funds more and more quickly. This is now easing, which is a healthy development”, thinks Rogers.
External financing via leveraged loans has become more difficult, he believes, and there are fewer M&A deals with private equity. He says that this will extend the investment periods for the equity funds. “Overall there are good opportunities now, however. I was more fearful around 18 months ago, when venture capital was provided for business models that had little prospect of yielding a profit and that were given absurdly high valuations.”