It feels like private assets are at a tipping point.
Unprecedented amounts of capital are being raised by large private asset fund managers, and they are now setting their sights on your pension and savings as a fresh source of capital. In the US, the industry is urging the Trump administration to allow retail investors access to funds that were once only available to institutions.
So are private assets about to go mainstream for private investors? If so, we ought to keep our wits about us, since the risks are not insignificant.
If you do take a chance on private assets, and especially private equity (PE), your options are typically limited to listed PE funds on the London stock market, many of which trade at significant discounts — chronic discounts in the case of multi-manager funds — to the value of the net assets in the fund.
But private assets contain a broad spectrum, and not all strategies are created equal. Many observers (me included) are concerned for instance about valuations for numerous late-stage, large-cap private equity deals.
More cautious investors worried about investing in single manager PE funds might be better off exploring more specialised ideas, particularly infrastructure debt, secondary market funds, and perhaps even investing in the equity of private equity firms themselves.
Let’s examine each of these options in turn. Infrastructure debt is simple enough, in that it provides investors with income from bonds and loan notes issued by private companies in the “economic” (or profit-driven) infrastructure sector — so these might include ports or data centre operators.
Two UK-listed funds dominate this niche: Sequoia Economic Infrastructure (SEQI), a fund of more than £1bn yielding 8.9 per cent; and GCP Infrastructure Investments (GCP), yielding just under 10 per cent. I think both yields will prove attractive in a world where UK interest rates are steadily coming down.
Private credit, which is lending to private corporations, is extremely popular among yield-hungry investors; however, if I were lending money, I would only want to lend to stable, defensive infrastructure businesses, which is where these two funds come into play.
Another arguably more defensive strategy involves capitalising on the secondary market for private equity assets — which is where pre-existing investor commitments can be traded. Take the example of Harvard University, which is grappling with numerous issues, not least that the Trump administration has frozen $2.2bn in funding. Additionally, returns on Harvard’s private equity investments, which comprise a substantial portion of its more than $53bn endowment, have slowed. One response has been to raise cash by selling $1bn in private equity positions on the secondary market. Other prestigious institutions, such as Yale, are also considering this strategy.
Current market conditions provide opportunities for what are called secondary funds, with many private equity firms raising record-sized funds to acquire undervalued assets from other private equity houses.
Secondary sales often involve a private equity investor or fund selling assets to another, typically at a 10-20 per cent discount to their recorded value, although discounts can be much greater if markets go haywire. Investors all have their own time horizons and sometimes PE investors need to sell out early, even if that means selling at a discount. Time it right and secondary funds with capital ready to deploy can selectively choose the best deals and potentially secure a larger discount to the reported value.
Some market observers say it’s a buyer’s market, presenting the most substantial opportunity secondary funds have ever encountered. Specialist secondaries managers have been quick to act.
Firms like Ardian, Hamilton Lane, StepStone, and Lexington Partners have all recently raised record funds to purchase second-hand fund stakes. A single secondary fund could provide instant diversification across managers, strategies, sectors, and vintage years, as well as exposure to 5,000-10,000 underlying companies.
One appeal of these secondary market funds is that they allow you to bypass the riskiest phases of a private equity primary fund lifecycle, which is typically negative as capital commitments are drawn down and investments made.
This has two implications for secondary funds: the potential for faster returns and a narrower range of outcomes, making total failure significantly less likely — although it may also lead to potentially lower returns.
Importantly, some of these specialist secondaries managers are creating private-investor-friendly versions of their multi-billion-dollar flagship funds: no minimum investments, no lock-in periods.
One notable example is the Franklin Lexington PE Secondaries Fund (FLEX), managed by Lexington, the specialist manager reportedly acquiring Harvard’s $1bn portfolio. The $334mn StepStone Private Markets Fund (SPRIM Lux) also offers exposure to secondary investments (40-70 per cent of the portfolio), alongside co-investment and primaries across private equity and private credit.
£26,000
Secondary investments starting level
Similarly, the $5.35bn Hamilton Lane Global Private Assets Fund anticipates that secondary investments will constitute 30-50 per cent of the portfolio. Unlike institutional funds, which may have minimum commitments reaching into the millions and capital lock-up periods of more than 10 years, you could invest in any of these three funds starting from £26,000 (they are all available through the specialist platform Wealth Club): there are opportunities for monthly subscriptions and quarterly redemptions.
Lastly, the equity in private asset managers also deserves closer examination. Ironically, despite the popularity of private assets, many shares of leading private equity firms are (relatively) underpriced, which does not inspire confidence in private equity as a business model.
However, this caution can sometimes be overstated. For instance, consider shares in Petershill Partners, a Goldman Sachs-backed (and largely GS-owned) investor in a multitude of private asset managers, which trades at very low multiples compared with its book value (those assets are believed to be worth at least 1.5 times the share price).
The yield on the stock exceeds 5 per cent, and the fund manager has been returning cash to shareholders via special dividends. Other leading, less diversified publicly listed players include the Carlyle Group in the US (trading at 12 times earnings on a dividend yield of 3.4 per cent) and the UK’s very own Intermediate Capital Group (trading at 14 times earnings on a yield of 3.9 per cent).
Like it or not, more of us will probably end up owning private assets in one form or another over the next few years, simply because so many public stocks are being taken private, limiting our choice. The trick will be to own the right assets, in the right structure, at the right price.
https://www.ft.com/content/6fb17387-24a9-46b2-9cb0-517c4844194d
