Last week, Zach attended a one-day Fiera Capital Private Markets Conference in Toronto.
The conference hosted a number of industry guest speakers, along with some members of Fiera’s investment management team, to discuss the following topics:
- Cushioning your portfolio from inflationary forces
- Navigating risk and protecting value in times of heightened uncertainty
- Breaking through the noise of ESG investing
- Creating portfolio stability through strategic allocations to Private Markets
Private investments can involve a number of different subsectors including real estate, private equity, real assets, infrastructure, agriculture, debt and venture capital investing. The rising interest rate environment presents opportunities as well as some challenges for the asset class. As a result of the growing interest in private investments, investors must carefully evaluate the benefits as well as the risks as there is a lot of competition for investments. Heighted competition can potentially lower future returns as investors compete for deals and allocating funds. There are many large asset managers with expertise in private investing but just because a firm has many years of experience or has billions invested in the sector, does not automatically mean there won’t be missteps. The pressure to invest funds to earn fees and grow assets should be balanced with the right alignment with investors interest.
The key to investing in private assets is to have a longer-term investment horizon as investments may need a longer timeline to come to fruition. The recommendation for private equity is having at least a 5 - 10 year time horizon to see investments through various economic cycles. Some of the advantages over public equities is the access to information to better manage downside risks as well as upside potential. There can also be better alignment of incentives with management than some public equities and without the same governance issues.
The disadvantage is illiquidity in certain sub-segments, which is not for everyone. The question is: how much one should allocate to a portfolio? The smoothed returns of private equity can also understate the economic risk, which is a result of the lack of mark-to-market for illiquid assets (i.e. pricing of assets can be the subject of debate and may be more art than science). Public equities have a daily market – everyone can see what a company is trading for, regardless of whether a company is overvalued or undervalued at the price.
Private equity investors should view the asset class through the lens of a long-term investment. Of course, the value of that asset will increase or decrease over time, but it may not be always accurately reflected. Additionally, the common practice of appraisal-based or self-reported Net Asset Values can understate risk. Additionally, large private companies will tend to have more debt on their balance sheets than public equities and in the current environment, where the IPO market is not receptive to new listings, investors may be forced to hold on to investments longer either delaying their exit (and monetization) of investments or sell at reduced values due to lower valuations. This can be avoided by having a longer-term time focus with this asset class.
Private investing is a unique asset class with trade offs that are very different than public equities. One needs to consider whether the benefits over different economic periods outweigh the risks to determine whether to allocate to private equity within a portfolio. While it may be a good fit for some, like other investments, it may not necessarily be a fit for everyone. Let us know if you have any questions on the sector.
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