First, let us explain what private assets are and what they have to offer. Private assets include buyout funds, private debt, private equity, venture capital, private real estate and so on. They are essentially any investment opportunity that is not available through public markets. Portfolio managers who invest in private assets aim to tap an alternative source of return that would not be possible if these assets were traded each day. They often look at the operational issues that, if solved, could benefit investors. This might involve digitalizing the business by updating its IT systems. It might also require trimming down or refreshing a product range. Or it could involve shutting down a loss-making division or tilting the business towards more attractive sources of revenue.
The attraction of investing in private assets is that they are less exposed to the short-term volatility found in public markets. Although this makes these assets less liquid, portfolio managers that invest in them are usually more concerned about the fundamentals that support them. Their goal is to unlock the value and growth potential of these investments over the long term.
Investors are already increasing their allocation to private assets
According to the 2021 CIO Sentiment Survey produced by top1000funds.com, many institutional investors are increasing their allocation to private assets. According to these survey results, investors now appear more willing to pay an illiquidity premium and lock up their cash for longer in private assets.
There have been two powerful factors driving investors towards private assets over the past decade. The first includes the changes experienced in the way investors construct portfolios. The second centers on the huge improvements made in regulatory infrastructure, particular in leading jurisdictions such as Luxembourg.
The rise of risk premia investing
Investors have been shifting their focus away from traditional asset allocation for some time. Many are constructing their portfolios using individual sources of risk premia rather than focusing on broader traditional asset classes.
Extraordinarily low interest rates have driven this trend as they have flooded public markets with liquidity and created significant asset price inflation across asset classes. Subsequently, returns between asset classes have become more correlated, reducing the diversification benefits from traditional asset allocation. This has led investors to seek alternative and less correlated sources of premia, which has driven them towards private assets.
The advances made in fund infrastructure
Another reason why investors are more willing to invest in private assets is because the regulatory environment has evolved and, consequently, fund infrastructure has improved. It has made private assets much more attractive to institutional investors.
Luxembourg is an interesting example. Huge changes have been made to Luxembourg’s fund infrastructure for private assets, driven predominantly by changes in the European regulatory framework. Subsequently, Luxembourg’s regulator has now authorized over 267 alternative investment managers (abbreviated AIFMs), while 600 have been registered.
Real estate, private equity and private debt have since all experienced a significant increase in assets under management. Real estate experienced 7.2% growth in 2020, bringing its total assets under management to €88.2 billion. Meanwhile, private equity has seen its own assets under management grow to EUR 148 bn, equating to 19% year-on-year growth as of the end of September 2021. Private debt over the same period has climbed 14.5%, increasing its assets under management to over
EUR 56 bn.¹