From the prospect of lower interest rates to the inclination of high-growth businesses to remain unlisted for longer – not to mention the need for new ways to diversify portfolios as bonds and equities become more closely correlated – there are plenty of reasons why professional investors should be considering private assets for their clients.
Equally, as a number of high-profile episodes across private equities and debt, infrastructure and real estate have shown in recent years, this is an area investors have to approach with their eyes wide open. In this Q&A session from Wealthwise’s inaugural Wealth Forum at the end of last year, Jack Wasserman, investment director at Schroders Greencoat, discusses the potential upside – and risks – of an allocation to private assets.
‘Private assets’ can mean different things to different people, how would you define the term?
When we talk about ‘private assets’, it really covers a wide range of investments but, in its simplest definition, it refers to investments that are not traded on public markets.
The main private assets asset classes include:
* Private equity: Investments in private companies or even buying out public companies. These are not available for everyone to trade.
* Debt Instruments: Lending directly to private companies or projects.
* Real assets, including real estate and infrastructure: From office or logistics buildings to wind farms and solar parks, for example, these are tangible investments that can provide reliable cashflows with great inflation protection.
The lines between private and public markets are starting to blur as private investments continue to become more accessible to a wider audience. This shift is powered by innovative structures, regulatory alignment and new technologies, such as tokenisation and online platforms, which are using tech solutions to break down barriers.
As an investment opportunity-set, private assets have been around for a long time in institutional portfolios as well as the more sophisticated family offices. Management consultant Bain & co, for example, has suggested that, by 2032, around 30% of global assets under management could be in alternative investments, with a significant chunk in private assets. For its part, JP Morgan recently published a family office survey that shows a 45% allocation to private assets.
There is no denying, however, that a wider pool of investors are now able to access private markets and, as a result, greater education is needed. Private markets are here to stay and we expect them to play a bigger role in our investment landscape moving forward.
“The beauty of private markets is they offer a range of potential outcomes, such as boosting returns, generating higher and more stable income and providing genuine diversification.
Please could you summarise the case for and against the principal private-asset categories?
It is important to start by recognising the breadth of investment themes available across private markets. As an example, around 90% of companies in the US are private, which means there are fantastic opportunities to invest in sectors like healthcare, AI financing and the energy transition, which have a broad base across private markets.
When considering those four principal categories of private assets – private equity, private credit, real estate and infrastructure – each comes with its own set of sectors, risk profiles and return potentials. The beauty of private markets is they offer a range of potential outcomes, such as boosting returns, generating higher and more stable income and providing genuine diversification.
Private equity, for example, has historically delivered outsized returns compared with listed equities while private credit can offer higher income streams. For their part, real assets such as infrastructure can deliver on both stronger returns and risk reduction while giving exposure to risks that are hard to find in public markets, such as power-price risk. These assets can really help create a more efficient portfolio for clients.
One challenge to consider right from the start is liquidity – or rather, illiquidity. By their very nature, private assets are not traded frequently, so it is critical to approach these investments with a long-term mindset, even if some structures offer limited liquidity options.
To what extent has the introduction of the long-term asset fund (LTAF) changed how investors should think about private assets?
The introduction of the LTAF is a real game-changer and the relevance of this structure for the UK wealth audience is undeniable. Initially, the first iterations of LTAFs were designed with specific groups in mind – for example tax-exempt investors, defined contribution and defined benefit pensions and charities.
In June 2023, however, regulations changed to open up access to advised and discretionary retail investors. With the launch of LTAF open-ended investment companies, we are seeing an exciting opportunity to offer access to these differentiated investment outcomes.
The LTAF is not just a new product – it has the potential to transform how investors approach private assets, making them more accessible and appealing across various investor segments.”
Jack Wasserman, investment director, Schroders Greencoat
Similarly, we have seen semi-liquid fund structures gaining traction over recent years and these are becoming increasingly essential for wealth management businesses looking to include a private markets proposition in their offerings. As an example, Schroders recently announced an exclusive partnership with a European bank that had not offered private assets or alternatives to its clients in more than a decade – and we believe the introduction of the LTAF could spark similar demand in the UK.
It is also important to note that some of the UK market is already familiar with private asset investments, such as infrastructure and private equity, due to the history and success of the investment trust structures. Importantly, the conversation should not focus on ‘LTAFs versus trusts’ – but should acknowledge how they have different characteristics and together can be complementary in offering different ways to gain exposure to private assets.
In short, the LTAF is not just a new product – it has the potential to transform how investors think about and approach private assets, making them more accessible and appealing across various investor segments.
How justified are concerns about liquidity and valuation and how can investors guard against the associated risks?
I would reframe that question, if I may. The key concern here would be whether investors understand the characteristics of the products there are buying. Both liquidity and valuation in private assets deserve careful consideration.
By their nature, many private assets are not traded frequently, making it challenging for investors to access their capital quickly, if needed. Unlike public equities or credit, which can be sold almost instantaneously, private investments often require a longer commitment, meaning your capital could be tied up for years. That said, it is also important to consider how often people actually access their pensions or ISAs. For many, these are long-term investments where immediate capital is not required.
Valuation is another critical area of for investor due-diligence. Determining the fair value of private assets can be complex, given they often lack readily-available market prices. This lack of transparency can make it difficult to assess the true value of your investment, especially during market fluctuations.
In practical terms then, how can investors guard against these risks? Here is a short checklist:
* Position sizing is key: While family-office allocations tend to be around 45%, we are seeing the wealth market for suitable clients comfortable with 10% to 20% in private market illiquid and semi-liquid structures.
* Diversification: By diversifying, you reduce the impact any single asset or sector may have on your overall portfolio.
* Due-diligence: A well-managed fund with a strong track record can help alleviate concerns around valuation and liquidity.
* Liquidity management: Especially in semi-liquid vehicles, it is important to research how liquidity is managed as this varies across different funds.
* Staying informed: Regularly monitor your investments and engage with fund managers for updates on valuations and liquidity.
While liquidity and valuation are important to consider, the long-term potential of private assets can be worthwhile. It is also useful to remember that liquidity risk comes in many forms. The top 10 companies of the S&P 500 now make up about 30% of the index, while the top 10 in the FTSE 100 account for almost 50%. This reality underscores the value of diversifying into private assets, providing exposure to a broader array of businesses and growth opportunities not available in public markets.
Institutional investors have been allocating to private assets for some years now – are retail investors ‘late to the party’?
Not at all. The dynamic we have in the market is still one of a shortage of capital versus the projects and opportunities available. This is creating an environment where both individuals and institutions can benefit from a great entry point.
I can mainly speak to infrastructure but now looks the best entry point we have seen in a decade for the renewable infrastructure investments we make. If you think of the capital needed to progress the expansion of AI or to deliver the energy transition, there are simply too many projects relative to the money we have available. Governments do not have the capital, which means returns have to incentivise private capital to deliver on these opportunities.
How does the current interest-rate environment affect the outlook for different private assets?
Interest rates can certainly shape the attractiveness of an investment. Base rates impact the way we value assets and the borrowing costs of leverage, which is why it is important to pay close attention to not just the headline leverage number, but the full ‘look-through’ figure as well as the way that is structured – amortising debt backed by contracted cashflows versus large bullet loans with repayment/refinancing risk. Clearly lower rates benefit yielding assets and broader valuations but that is not necessarily a requirement.
The current interest-rate environment significantly affects how we value different private assets and it is essential to understand these dynamics to make informed investment decisions.
Regarding private equity, while higher rates might suppress valuations, it is also important to consider that private equity firms can adapt their strategies. Some focus on the small to midcap end of the scale where leverage is less prominent versus the ‘mega-deals’ you see on the front pages. Moving into a more stable or even cutting environment would be beneficial for these investments but it is not a requirement.
What are the practical considerations for professional investors and their clients thinking about private assets – for example, appropriate platforms, tax wrappers and so forth?
Great question! As mentioned, we are right at the beginning of this journey in the UK, so investors are certainly not ‘late to the party’. From the conversations I am currently having, though, that could have changed by this time next year. Key things to consider and areas we need to get right is the best way to access the asset class. Currently, the eligible tax wrappers do exist – Innovative Finance ISA can be used to invest in LTAFs and LTAFs can be held in Sipps and also now in Non-Ucits Retail Schemes funds.
As for platforms – as ever with new areas – there is an element of ‘chicken and egg’. Nevertheless, we are in discussions with a number of advice platforms and hope to onboard our first LTAF – and we expect this to increase over time as more capital follows. When you hear reports of ‘no demand for LTAFs’, it is key to remember that the first wealth LTAF was only launched in the last quarter of 2024. We are also now starting conversations with Sipp providers to ensure LTAFs can be offered via this pot.
The UK wealth and advice market is behind when it comes to market infrastructure development – US and European wealth and advice businesses have for a number of years been using platforms that have developed the infrastructure to deliver semi-liquid and closed-ended funds– the UK is the exception rather than the rule. The DC market in the UK has also now developed platform solutions. So it is not a matter of ‘if’ but ‘when’.
If pushed to invest in a single private asset class, on a five-year view, what would you pick today and why?
Given my connection with Schroder Greencoat, no prizes for what I am going to say here! Global energy infrastructure, such as renewable energy and energy transition infrastructure, is offering investors high inflation-linked cashflows with genuine diversification for investors.
