Investment professionals are increasingly turning to unlisted markets to diversify investors' portfolios as more businesses choose not to be listed on stock exchanges and listed shares become increasingly concentrated.
However, investment options in the unlisted or private equity and credit markets are mostly global and accessible only to institutional investors, but this is likely to change soon, recent investment forum conferences organized by the Collaborative Exchange in Cape Town and Johannesburg showed.
Companies are not getting listed
Since a lot of funding for companies is no longer coming from listed markets, fund managers and discretionary fund managers (DFMs) are looking towards private markets for investment opportunities and good growth, Gyeongyi King, chief investment officer (retail investments and private markets) at Investment Solutions, said in a panel on private markets at the conference. Investment Solutions is AlexForbes' Multi-Manager and DFM.
This is especially the case in new industries, such as businesses supporting the expansion of artificial intelligence (AI), King said.
Dino Zuccolo, head of investor solutions at Westbrook Alternative Asset Management, said the number of companies listed on the US market, UK market, JSE has halved in the last 30 years. The average age at which a company is listed has doubled in the last 20 years. Westbrook is a manager specializing in alternative investments in South Africa, the UK and the US.
At the same time, listed markets have become too concentrated in fewer large stocks, Zuccolo said. The so-called Magnificent Seven technology stocks now make up 35% of the S&P 500. This means that if you only invest in listed markets, you're not getting a portfolio that reflects what's out there.
Development of unlisted companies
In a recent presentation hosted by Discovery's DFM Cozens, Liam Davis, chief investment officer, head of wealth solutions, multi-asset strategies and solutions at BlackRock, one of the world's largest asset managers, said that nearly 90% of global companies generating more than US$100 million in revenue are now privately held, and many high-growth companies remain private for more than a decade before listing.
BlackRock manages US$613 billion across private equity, private debt, infrastructure, real estate and other options for its investors. This represents five percent of BlackRock's assets under management, but the business expects to grow it significantly and has built a large team of private markets investment professionals around the world.
Private credit fills banking gap
Zuccolo said deregulation after the global financial crisis in 2008 resulted in banks focusing on larger long-term loans. This opened up niche markets for private providers of short-term lending services, for example, the property market in the UK.
Cozens CEO Jonelle Mathie-Ferreira, who was also on the private equity panel at the conference, agreed that private debt is the future of finance because regulated banks can't lend in the same way they used to and AI companies need large amounts of debt which they will seek from private markets.
Diversity
Another reason investment managers turn to private markets is to improve diversification.
Mathie-Ferreira said that from 2022 onwards, returns from bonds and equities will no longer offset each other, providing the diversification that has traditionally been done. Bonds typically rise when equities fall and vice versa, but high inflation and rapid interest rate hikes halted this multi-year trend in 2022.
Mathy-Ferreira said the inclusion of alternative asset classes, primarily private equity and private debt, in global portfolios increases diversification and returns without increasing investment risk.
King said that for many years, South African equities delivered double-digit returns and there was no reason to complicate the portfolio with private markets investments. He said a multi-asset fund with 60% in equities and 40% in bonds had existed for many years, but structurally the market had moved on and now investors needed to access these new markets.
Mathie-Ferreira said that over the next few years, the traditional 60-40 split between equities and bonds will become 50-30-20, 50% equities, 30% bonds and 20% alternatives, mostly in private markets.
risk
Chairing the private equity panel, Andrew Cormack, independent financial advisors and global head at INN8 Invest, said there is an argument that returns from private markets are higher because investment risk is higher.
He said that in private markets information is not shared well, there is less transparency, money needs to be invested for long-term value and there is a possibility of counterparty risk.
But King challenged this, saying that private market investments yield higher returns because they are not priced daily and are not liquid. He said, it is not necessarily more risk, it is a different kind of risk.
Zuccolo said investors in private markets should earn higher returns due to lack of liquidity, transparency and regulation. He said that in private markets it is possible to operate more freely and rapidly in specific markets, which should generate higher returns.
Mathy-Ferreira said multi-managers and DFMs can balance risks by diversifying across a basket of options including private equity, private debt, infrastructure and real estate.
choose a good manager
The important thing for anyone investing in private equity or credit is to conduct due diligence on the investment, said Sean Neethling, head of investments at Morningstar Investment Management, DFM.
He said it is likely that appetite for private market investments to complement traditional asset classes will increase over the next five to 10 years, but the research on these investments needs to be stronger so that investors' money can be allocated responsibly.
Zuccola agreed that the quality of the manager selecting your investments “is everything” in these less regulated, more direct markets.
Where to get exposure to private markets?
Like your superannuation fund, institutional investors are the most common investors in private markets, and the limits on access to these markets set out in Regulation 28 of the Pension Funds Act were recently relaxed.
Individual investors have little access because:
- Unlisted assets are often illiquid – many require terms of five to seven years – and their prices are not daily.
- The use of unlisted assets and those that are not priced or traded on a daily basis has restricted unit trusts and investment platforms from exploiting these investments.
However, providing access to global private markets is becoming easier as Europe introduces new structures, Cozens has proven.
Individual South Africans can invest in one of two portfolios offering a 15% allocation to private markets through Discovery's endowment policy and European investment vehicles. The underlying private markets investment fund is a European Long-Term Investment Fund (ELTIF) and is managed by BlackRock, Cozens Chief Executive Officer Jonelle Matthey-Ferreira said in a recent presentation to the media.
ELTIF is regulated by the EU and must provide liquidity – access to capital – after only two years of existence. This allows investors who need access to their capital if they need it.
Other more liquid investment vehicles are also giving individual investors in North America and the UK access to private markets, said Dino Zuccola of Westbrook Alternative Asset Management at the Investment Forum. These include evergreen funds that allow investors to make periodic entry and exits as well as make periodic partial redemptions, tender offer funds that allow investors to offer their shares back into the fund at specific times, interval funds that offer periodic repurchases of shares and exchange traded funds (ETFs) that incorporate private markets.
Investment Solutions Gyeongyi King explained at the Investment Forum that individual investors can invest through life annuities linked to investments in private markets and hedge funds, depending on how these products are structured, as there are no investment restrictions for living annuities.
Where retail investors have access, they have earned good returns. He said, although unit trusts are still a problem, other structures are developing very rapidly, which is quite exciting.
This article was first published SmartAboutMoney.co.zaan initiative of Association for Savings and Investments South Africa (Asisa).
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