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Getting to grips with private market investments

18 January 2021 David Moore, Head of Alternatives at Alexander Forbes Investments

What are public and private markets?

Investors put their money in expert hands to grow it through investments in shares, bonds, cash and property. These are traditional investment types available on the stock exchanges of most public markets.

However, investors can also choose to invest in alternative investments – available in private markets. This gives them access to investment types that are not available in public markets or publically listed exchanges. Because it’s not as easy to buy and sell these investment types freely, they require a commitment to longer investment periods. In return for the duration of their commitment, investors are typically rewarded with the prospect of a higher return, or an illiquidity premium, on their investment.

Why are alternative investments in private markets important?

“Over the past 20 years most traditional asset classes have delivered double-digit returns for investors. This has changed. Market participants agree that traditional asset classes are expected to deliver lower real returns in the future,” says David Moore, head of alternatives at Alexander Forbes Investments.”

He adds, “Furthermore, a growing theme prevalent amongst modern-day investors is the need to invest not only for financial return but to ensure their investments make a meaningful, positive impact on the world in which we live – a key tenet of private market investing where an investor can capture a tangible ESG dividend.”

Moore highlights the features of private market investments that make them an attractive option for attaining longer-term client objectives from both a return and social good perspective.

1. Enhanced investment returns
Private market investments can offer higher investment returns compared with traditional asset classes because of the size and value of the investment.

2. Increased access to opportunities
With private markets, investors have access to investments that are not available on public markets. For example, the South African public exchanges have limited exposure to companies in the technology or clean-energy space. In the rest of the African continent, private markets are larger than public markets. Therefore, to take advantage of investing in countries where there are no or limited public markets, for example Ethiopia, one can access opportunities through private markets.

3. Long term
The underlying investments are long term, with the investment terms and liquidity differing across the following private market strategies:

• Private debt – shorter investment period, easier to trade with partial liquidity before maturity
• Private equity – longer investment period, less easy to trade, focused on growing capital invested
• Direct property – attractive ongoing income with returns linked to inflation, making it easier to trade
• Infrastructure – longer investment period, can pay out income from time to time, growing capital invested over the longer term with returns linked to inflation

4. Diversification
Private markets can provide exposure to return drivers that are not available in the traditional asset classes. These return drivers are attractive because they:

• could offer greater compensation for risk than might be available in the liquid public markets
• are expected to provide a different return profile relative to other parts of an investor’s portfolio

5. Protection against inflation
Investments in assets such as infrastructure and direct property offer investors returns linked to inflation. The prices at which one can sell these assets, as well as the regular income generated by investing in these assets, typically rise in line with inflation. “The way our private markets programme is designed means that the blend of strategies not only delivers an attractive inflation-linked return, but also provides clients with access to orderly liquidity not typically available in other private market programmes,” says Moore.

6. Benefits for society
Private markets offer an opportunity to invest in projects that contribute to economic and social development objectives, as well as the transition towards a greener economy by investing in renewable energy projects. Some projects target specific social development objectives, such as providing quality education and affordable housing. Other projects assist in developing and uplifting the communities that surround them. These social development objectives relate to empowering local workers by:

• creating jobs and transferring skills
• providing primary healthcare and HIV Aids care
• upgrading the living conditions of those within the community

“Incorporating private markets into a conventional investment portfolio increases the likelihood an investor can achieve better risk-adjusted returns with reduced portfolio volatility as well as increased returns over the long term,” concludes Moore.

 

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