Podcast: An Adviser's Point of View – Private Assets

Private markets have grown substantially in scale and accessibility in recent years and now offer a viable alternative to public markets for both investors and companies. There is growing evidence that private markets can generate higher returns than public markets. However, private assets also come with additional risks – including illiquidity – and are only considered appropriate for investors who can afford to take that risk.

Listen to the podcast to find out more. 

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Podcast transcript

Stuart Ellis: Welcome to An Advisor's Point of View. Cazenove Capitals’ podcast series for financial advisers. I’m Stuart Ellis, Portfolio Manager in the DFM team. Our guest today is Nathalie Krekis. As well as looking after private individuals and charities, Nathalie is spearheading our efforts to make private assets accessible to our mutual clients. And that is the subject of today’s conversation. Nathalie, thank you for joining us.

Nathalie Krekis: Thank you.

Stuart: We hear a lot about private assets. Can you start by telling me exactly what the phrase refers to?

Nathalie Krekis: Yes, of course. I think people's first instinct when you start talking about private assets is to just think about private equity. However, it's considerably broader than that when you take into consideration other parts of the market, like private debt, real estate, securitized credit and infrastructure. So, when we talk about investing in private assets, we're talking about investing in assets that are not publicly listed and traded.

Let's use a well-known example, Meta, previously known as Facebook. It was a private company until it held its initial public offering, or IPO, in 2012. From that point, anyone could buy shares in the company.

Private assets are typically less liquid in nature, and more difficult to access as an investor, although as I'm sure we will come on to talk about later, access to investors is improving.

Stuart: And why has it become such a hot topic?

Nathalie Krekis: It's a really good question. We've seen significant growth in private assets over the past two decades and 2021 was actually a real blockbuster for fundraising and deal flow. I read somewhere that early estimates show private equity managers carried out almost 30,000 transactions last year, so really quite a big number. Preqin is an organisation that collects data on alternative assets, anything outside the realms of traditional listed equities and fixed income. Some of their recent analysis showed that the average private equity fund has grown by almost 50% over the last 5 years. If you look at the average infrastructure and real estate funds, they've grown by about 28% and 21% respectively.

I also think that this trend, which has generally been unfolding over the last decade, was then accelerated by the pandemic. We had ultra-loose monetary and fiscal policy. When combined with pretty impressive historic performance, I think that's really turned investors' heads towards the asset class.

Stuart: Now, you mentioned Meta just a moment ago. One question lots of clients must be asking is, is it too late?

Nathalie Krekis: Yes, I think that's a really valid question. And I think that's partly because private equity, quite frankly, has been getting a lot of airtime recently. And especially going back to that point I made earlier, given we saw record levels of private equity fundraising in 2021.

I think the key point here is to be selective in the parts of the market you are looking to invest in.

If you look at the venture and growth markets over the last five years, we've seen 240% growth in fundraising. And this has really been driven by the emergence of the so-called unicorns, which essentially are private companies with valuations over a billion US dollars. Within venture, late-stage and pre-IPO financings of high-growth companies, I agree valuations are most definitely running ahead of historic averages. If you contrast that to looking at buyout fundraising, the numbers are actually not quite so huge. Over the same period, fundraising has grown by about 59%.

Now, that's all the bad news. I don't want to put you off investing in private assets. Something that Schroders Capital talks about at length is investing in the "long tail" of private assets. That's actually where the most transactions take place. This is typically at the small and the mid-end of the market segment. So, if you look at the largest private equity transactions, they represent about half of the total deal volume but less than 5% of the number of transactions.

The point I'm making there is that yes, there are parts of the market which look a little overheated. But by partnering with the right manager and looking at the small and mid-size parts of the market, you can actually still see pretty good levels of valuation, which aren't too far above historic averages.

Stuart: So, what are the benefits to investors?

Nathalie Krekis: So, I want to answer this question by explaining why we believe this is the right thing to do and allocate to for our clients. I'm going to talk about the US market because it gives us quite a large depth of data. If you look back at the two decades prior to 2000, we saw on average 300 companies choosing to go public every year. In the following two decades, that number has averaged around 180 a year. So, the numbers don't lie. Companies are choosing to stay private for longer, or just not going public at all.

Now there are two reasons I think for that. In an environment of very low interest rates, it's never been easier to find financing without going down the traditional route of an IPO. And then secondly, I think the stock market just no longer always feels like the place for patient capital. The types of companies we're looking at really need that long-term capital given they're producing highly innovative products or services. I read quite an interesting piece a while ago which showed that the average holding period for a stock had fallen from six years to six months. Now, whether you can blame algorithmic trading, or just investors becoming more impatient and wanting good shorter-term performance, who knows? So that's the rationale of why we want to do it for our clients.

What are the actual benefits once they're invested? Now there are two key factors for that. The first is obviously around performance. There is significant evidence now suggesting that private markets can generate higher returns than public markets, and this additional return can be thought of as compensation for their lower levels of liquidity, and potentially the greater complexity of private investments. I have focused quite a lot on private equity. So, if we take a step back and look across to the private debt market, since the global financial crisis in 2008, we've seen quite a dramatic deleveraging of bank balance sheets and the retrenchment of those traditional lenders. And that has opened up quite a big opportunity for private lenders, who are aligned with business growth objectives but can also command higher levels of interest compared to conventional bond market. Now again, that's pretty attractive for an investor who's looking for yield in a low yield world.

The second benefit is really around diversification. The pattern of returns you get from private markets typically look quite different to public market returns. So that's why again, we think they should form a portion of your total portfolio.

Stuart: So what would you say the options for DFM clients are when it comes to private assets?

Nathalie Krekis: I want to answer this question by starting with a large caveat, in that when we're considering an allocation to private assets for any of our clients, it's highly customised and developed in line with each individual client's needs. Now, I mentioned the word illiquidity earlier. These are more illiquid assets by nature. So, it's absolutely crucial that we tailor this to each individual client's needs. And that's talking around their complete financial position. So, what are their liquidity needs from their portfolio? What is their income? What is their expenditure? Can they afford to have assets tied up for longer?

Stuart: I have spoken to some advisors recently who were concerned about the liquidity behind private assets themselves.

Nathalie Krekis: Yes, and I mentioned this briefly earlier. But that's, I think, one of the really exciting things about investing in private assets today, in that we are seeing this huge democratization of the asset class. It's becoming increasingly accessible to a wider range of investors than we've seen previously. And part of that democratization is the increasing availability of semi-liquid structures, which gives you exposure to true private assets. And again, that is something we thought about when building out a framework for our clients who want to invest in private assets, but potentially don't want to think about the traditional ten years plus lock-up that private assets come with.

Stuart: And what areas are you really focusing on?

Nathalie Krekis: So, I can go back to my earlier comment, I think it is really crucial to be selective when investing in private assets, looking forward and considering the landscape we're in now. The universe, as I said, has expanded significantly in recent years. So, the plus from our point of view is that we are seeing more and more opportunities where we can invest for our clients. 

Going back to private equity, I think the pandemic accelerated a lot of trends. And talking to our private equity managers, they're seeing a lot of opportunities to capitalize on some of these trends - such as working from home or how consumers are thinking about purchasing items. Also more broadly, looking across things like infrastructure, thinking about the energy transition, which has come back into focus given the events that have been going on since the start of this year.

Stuart: And will there be a home bias, with a focus on UK investments? You mentioned the US earlier on.

Nathalie Krekis: This is definitely a global opportunity set, and the managers we have chosen to partner with, they're absolutely looking at this from a global perspective. And they have an extensive network globally of general partners or private equity fund managers that they have invested in and had relationships with for quite a long period of time. And that is so key when thinking about private assets - who your relationships are with and being able to source deals.

Stuart: Now – the question that is on everybody’s lips at the moment. How can you fit sustainability into private assets?

Nathalie Krekis: Yes, the first thing I would say, private assets and private markets have come under quite a lot of scrutiny about their disclosures, and there is most definitely a spotlight on the importance of disclosure and transparency. A lot of it has been driven by regulation, but also the rising social consciousness that we've seen. I think that broadly looking at the managers that we've partnered with and talking to them, this aspect is absolutely improving, and managers are being far more open about their approach and policy, and how they integrate that into their investment decisions.

What I think is actually more interesting and exciting from an investor's point of view, is having the ability to really reflect true impact in their portfolios. If you think about a private equity manager that is taking ownership and control and talking to a company, they are having a real impact on how that company is run. 

Stuart: Nathalie, as ever, it's been a pleasure talking to you today. Thank you very much for your time.

To find out more about Private Assets and discuss whether they would be suitable for your clients, please do get in touch with your usual Cazenove Capital contact.

Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Investors should only invest in private assets (and other similar illiquid and high risk assets) if they are prepared and have the ability to sustain a total loss of their investment.