Diversification and potentially higher returns are some of the commonly cited benefits of investing in private markets, within which sit various assets that can each play a different role in a portfolio.
The most common private market investments include private equity, venture capital, private debt and real assets, notes Emily Pollock, client director, private asset solutions at Schroders.
“Private debt has gained popularity in recent years as investors seek alternative sources of yield and diversification,” she says. “However, it is important to note that private debt investments are illiquid and typically have longer investment horizons compared to publicly traded bonds.
“Real assets can include a wide range of sub-asset classes, such as infrastructure, real estate, natural resources, land or energy assets; and most real assets typically generate reliable and predictable cash flows.
“Specifically, renewable infrastructure, which we focus on in two of our long-term asset funds, involves purchasing physical assets such as wind farms that generate renewable energy. The upside potential through variable energy prices and limited downside due to government backing results in a favourable risk/return profile for the investors' portfolio.”
Aligning with ESG
Indeed, the impact of global mega-trends – demographics, deglobalisation, digitalisation and decarbonisation – are reshaping private markets portfolios, says Matt Soffair, senior research manager at Legal & General.
“We believe it is critical to embrace this structural change when building portfolios,” he says. “For infrastructure investments, for example, this means aligning with assets that are critical to enabling the energy transition.
“Within real estate it is likely to mean lower allocations towards legacy sectors of offices and retail, and higher allocations to future-facing, resilient sectors such as residential and urban logistics.”
Beyond investment performance, Mark Meiklejon, head of real asset investment specialists at Aviva Investors, likewise says private assets can play a role in aligning investment portfolios with the energy transition, or capturing wider corporate values.
“For example, providing investment opportunities that can give returns but also have the potential to deliver positive social value and outcomes too,” he adds.
“The same is true for accessing certain sub-sectors. In some cases, private assets are the only way to invest in quite exciting and dynamic markets such as renewable energy projects, the life science sector, or supporting social housing associations.”
Greater diversification
Ben Leach, head of private market solutions at WTW, agrees there is an opportunity set that investors are not accessing if they only invest in equities and bonds, and not private assets.
“You're not getting a fully diversified portfolio without having some form of exposure to private markets,” he says. “We've been helping defined benefit pension schemes, sovereign wealth funds and insurers invest into [private markets] for 30 years.
“One of the reasons that many DB funds are now in such a healthy position from a funding status is because private markets have played a part in that.
“Even for a very short time horizon, mature portfolio, where you're looking to generate income and yield, you can utilise private assets like private credit where you're being paid a coupon every month. There's a way to potentially get additional returns or take different types of risk in the portfolio.”
