Once considered a tricky asset class for wholesale and retail investors to access, a growing number of private debt funds are now available in the Australian market, offering lower investment minimums and more liquidity than has been available in the past.
This democratisation of private assets has granted investors access to a larger investment universe, which coincides with greater innovation in the way that the funds are built amid changing technology and regulations.
Overall, portfolios can be diversified by allocating a portion to private markets as their returns are driven from factors which differ from public market valuations.
However, Morningstar CIO Matt Wacher warns of significant risks of downward valuations remain this year. While private equity and venture capital are most at risk in the short to medium term, real estate also remains overvalued, with capitalisation rates relatively low.
Regardless, private debt is one area of private markets that remains of interest as assets are generally floating rate, he tells Professional Planner.
“Spreads above cash can be significant, and can give an impressive total return,” Wacher says.
“There seems to be significant deal flow in the market as solid business search for funding means that private debt managers can be quite discerning about who they partner with and can build reasonable diversification across industry groups.”
But the notion that investors can reduce volatility by exiting listed assets and investing in unlisted because they are mark to market irregularly is just smoke and mirrors, he adds.
“If investors over-pay for assets because of some artificial concept that an asset has low volatility it still means they have overpaid for an asset and we see throughout history that overpaying for assets is the quickest way to destroy wealth when the environment changes,” Wacher says.