As readers know, private market investing is all the rage – to the point where some organizations have raised a few red flags. The private market story was front and center in the Morningstar conference attended by our US correspondent in Chicago recently.
Private market investments took a star turn at the Morningstar
Investment Conference in Chicago last week. Caveats abounded, to
be sure, but there was no doubt that private credit and equity
markets are top of mind right now for advisors and fund
managers.
Despite noting that alternative assets have disappointingly “over
promised and under delivered,” Morningstar CEO Kunal
Kapoor acknowledged that private markets are “where the momentum
is,” pushing the research firm to increase its coverage of the
asset class.
Financial advisory firms have developed a “big appetite” for
private market products, with many realizing that developing an
expertise in the asset class “can really create differentiation,”
said Hightower
Advisors CEO Bob Oros.
Multi-family offices are also paying attention. A recent UBS
survey of MFOs found that nearly one-third of respondents planned
to increase their exposure to private debt.
Wealth managers shouldn’t ignore private equity either, according
to a new UBS report. “This
is a good time to allocate to the asset class” the report stated.
“Entry valuations for new portfolio companies are back to
pre-Covid averages (unlike public equities), offering an
opportunity to acquire assets at a reasonable price.”
Major marketing opportunity
For investors who can tolerate the risk that comes with a very
opaque and unfamiliar market, meet high minimums and are willing
to forsake liquidity, private markets can provide uncorrelated
portfolio diversification and potentially higher returns.
Clearly, Wall Street sees private markets as an enormous
marketing opportunity, noting that less than 5 per cent of
individual portfolios have private market asset allocations.
Despite attracting billions of dollars as banks have withdrawn
from parts of the credit market, private direct lending remains
an “untapped” investing opportunity where “inefficiencies can be
exploited,” Blackstone managing
director Fran Golden told a packed audience of advisors and
wealth managers at the conference’s breakout session on “the
meteoric rise” of private markets.
Leveraged loans from private debt funds in the US gained 13.3 per
cent last year, according to the Morningstar LSTA Index and UBS
forecasts high-single to low double-digit returns for this
year.
Higher yields than traditional fixed income and a pullback in
bank lending has spurred capital committed to private debt
vehicles to skyrocket to $190 billion last year, up from $98
billion in 2013, according to the American Investment Council.
Evergreen funds (also called perpetual funds or open-end funds)
have emerged as the industry’s latest attempt to expand the
private market. These funds offer lower minimums, somewhat more
liquidity and transparency, and, unlike closed-end, limited
partnerships, evergreen funds don’t lock up investor capital for
fixed terms, which usually lasted 10 years or more.
“Lot of landmines” ahead
Nonetheless, private markets still pose “a lot of landmines” for
investors, according to Katie Koch, CEO of asset management firm
TCW. While “not a
catastrophe,” Koch, a former Goldman Sachs partner, said loan
defaults “will go up.” And, she added, “a lot of [private market]
vehicles haven’t been tested yet when liquidity is not
available.”
The most important task for advisors and investors is careful
manager selection, said Dylan Cox, head of private markets
research for PitchBook data, who moderated the breakout
session.
The dispersion between the performance of top and bottom quartile
managers is “quite different” and more pronounced than investors
are used to in the public markets, Cox said.
Unlike passive investments in public markets, private managers
actively oversee company portfolios, execute investment
strategies and navigate complex regulatory environments. As a
result, Cox and other Morningstar speakers urged investors and
advisors to carefully examine a fund manager’s experience and
track record when conducting due diligence and before making an
investment.
(To see a recent article posing questions about the scale and
growth of private markets, such as in credit, see these articles
here and
here.)