The current pandemic presents existential challenges to both the public and private markets. The public markets have performed their usual roller coaster of diving, then recovering. Many private fund managers are currently spending substantial time and energy understanding the impact of the lockdown on their underlying assets and what this means for NAV calculations.
Attitudes towards private assets have changed significantly over the last 10 years and their importance in portfolios is increasing. Crises like this cast a light on the fundamental differences between public and private markets and it will be interesting to see what this current set of extreme challenges teaches us.
Allocation to private assets is increasing, especially amongst ultra-high net worths
One clear trend is that allocations to private assets have increased significantly over recent years. According to a McKinsey report, private markets AUM have increased by $4trn (170%) over the last decade and 10% in 2019 alone.
Institutional and high net worth investors have a much larger percentage allocated to private assets than smaller investors. Research by the private equity firm KKR shows that UHNWs typically have 46% of their portfolio invested in the private markets.
Historically, private assets have typically performed better than public markets, which is driving the growth of private asset allocations
According to Schroeders, there are 4 potentially beneficial factors for investors looking to allocate capital to private assets. They:
- provide higher returns;
- give access to a broader range of exposures, industries or outcomes;
- reduce risk (volatility and/or risk of loss) and;
- add diversification benefits.
Private markets have consistently shown strong returns when compared to the public markets. Cambridge Associatesmaintain a ‘Modified Public Market Equivalent’ (MPME) index which aims to make it easier to compare public equity markets with PE. Over the last 15 years, private equity has on average returned 13.61% whereas the MPME for the S&P 500 is 9.45% (net).
Other private assets (real estate, forestry, infrastructure, debt, etc.) have also shown consistent results and add diversity to an investor’s portfolio and more options to control risk.
Individual investors are seeking access to private assets and managers are listening
Given the apparent benefits of private assets, it is no surprise that individual investors are seeking ways to gain exposure to this class of investment. According to Willis Towers Watson, the global asset base of HNWs stands at $60trn whereas that of pension funds is $36.4trn and this difference is growing year on year. Given the revenue opportunity from HNWs, asset managers and GPs are more open than ever to attract this source of capital. To help capitalise on this opportunity, the major private equity firms have been working with the SEC to allow retail investors to deploy 401k funds into PE funds and a number of PE firms now have distribution channels directly targeting wealth individual investors.
Technology will be the key enabler to opening this asset class to individual investors
Whilst there is demand from both investors and managers to make private assets more readily available, the lack of infrastructure makes it difficult to operate at scale. Most private fund structures are set up for institutional investors with high minimum investment amounts and manual investment processes. If private banks, wealth managers and other intermediaries want to give their clients access, this can involve the costly setup of feeder funds which are passed on as fees to investors.
Investors increasingly demand an online investment journey that gives them visibility of the process and removes the often laborious subscription processes of private funds. GPs and managers need an efficient mechanism to onboard investors and manage interactions with them throughout the investment lifecycle.
Private assets will never have the depth of liquidity implicit in public markets, but utilising technology will increase access to a secondary market that will create a mechanism for investors to rebalance their portfolios and potentially exit their positions should their investment objectives change.
How Goji makes a difference
Goji exists to make private assets as readily accessible as their mainstream counterparts. We serve the industry by providing investment platform infrastructure that meets the needs of investors, intermediaries and managers.
Our technology makes it efficient for managers to onboard a global investor base regardless of the scale of growth, saving fund managers and transfer agents the additional overhead of onboarding investors, processing payments and communicating investor updates. Investors and intermediaries benefit from an online investment journey and digital reporting.
It’s clear that private assets are set to be a growing part of an investors portfolio and investment in technology is needed to keep pace with demand. At Goji, we’re committed to building the technology and operational infrastructure that is needed to help this important asset class go from strength to strength.
Get in touch to find out how we could help.