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Supplements » SFA Report 2022

Private markets roundtable: Breakaway performance

Opportunities
The panellists appear united behind the thesis that private markets provide investors with diversification benefits.

WTW’s Hails highlights that investors increasingly need to opt for private markets to invest in certain sectors and companies that cannot be found in the public arena.

“In particular, venture capital and early-stage growth companies have to be done privately, [and] there are broad areas of private debt markets that you can’t necessarily get exposure to through public equivalents,” he says.

In addition, the opportunity to add value through alpha is one that presents itself through private markets. “Very, very active owners are given a different opportunity to create value, and that is a diversifying return,” he adds.

LawDeb’s Porkolab agrees, adding that private assets offer a very good variety of investment options, providing diversification even within the asset class, in the form of real estate, infrastructure, direct and asset-backed lending funding arrangements across different geographies and so on.

“That variety is now more available to institutional investors, which can bring significant diversification benefits.”

One of the obvious differences between private and public markets is investors’ visibility of the minute-by-minute performance of their investments. Stock exchanges are public, and news is widely reported when markets dip or climb. For private markets, there are no such updates, and as a result, private markets are less volatile.

For pension scheme trustees, according to Porkolab, this can be both a good and a bad thing. On the one hand, not being exposed to daily valuations and volatility could be considered a benefit of private assets. On the other, it could be argued that company valuations are not market tested. This raises some questions and challenges about transparency, market efficiency and, of course, liquidity.

“This was perhaps one of the reasons for the certain healthy level of initial resistance from pension funds to invest in these assets,” he adds.

But John McNichols, managing director and head of multi-asset strategy portfolios at Barings’ Private Asset Group, argues the lower volatility associated with private assets is intuitively appealing to investors.

“Historically, you see the actual volatility of credit returns measured by credit losses, not market value changes, to be fairly low compared to public markets. Because of the nature [of the asset] you tend to have better security, better structuring and you have more of a partnership between borrower and lender. Historically, you have higher recovery rates, so not only do you get an illiquidity premium, but you also lose less money,” he explains.

These are just a few of the elements that make private markets a “premium product”, according to Vikram Raju, head of impact investing (private markets), at Morgan Stanley Investment Management. One of the main benefits is the potential for additional returns.

“It’s been very hard with public markets on a tear,” he says. “But I think the level of sophistication in private markets, the ability to take a long-term view and make the capital trade-offs needed, the increased amount of deal flow – all that will lead to a substantial breaking away in performance between public markets and private markets.”