Getting private market investments wrong can cause long term, compounding losses and it’s important to have a strong research function in place to tackle “information asymmetry” in private markets.
In a panel discussing the concept of democratising private market asset classes for retail investors, Koda Capital chief investment officer Norman Zhang told the Professional Planner Researcher Forum much of the challenge was getting the right information.
“I always say to people getting the wrong alternatives, you’re compounding negative returns at double digits per annum, so you don’t want to get it wrong,” Zhang said.
Due to the issue of “information asymmetry”, detailed research is necessary, which limits the number of products available to investors.
“We actually run research on a narrow range of products that we understand fairly well, and it takes us time to do so,” Zhang said.
“It takes time to build a portfolio with all these elements in there, granted, but if you’ve got a pretty robust and experienced research team…and you know how it works, I think you mitigate some of the risk.”
Mercer Investment head of wealth management investment solutions Rebecca Jacques also supported having a separate team to handle the mitigation of risk. Jacques said there should always be an operational due diligence team.
One of the challenging aspects of private market investments is liquidity which becomes further compounded for smaller pooled funds for retail investors.
But JANA Investment Advisers head of wealth Michael Karagianis said investors think they need more liquidity than they do and there is a general approach that investors “need very liquid strategies”.
“This does present problems in terms of managing an overall portfolio, particularly in a managed account context, because the liquidity being locked up in one component part can produce problems in terms of managing the totality of the portfolio,” Karagianis said.
“Funds are responding to that and so you’re seeing strategies that hitherto were quite illiquid.”
Jacques agreed that despite popular belief, not all investors need liquidity on 100 per cent of their portfolio every day.
“The whole concept of liquidity has always bothered me, because people pretend that retail investors need liquidity,” Jacques said.
“The challenge you have with private markets is people talk about them as being locked up investments and illiquid. They’re actually constantly liquidating investments. Unlike a unit trust or a daily liquid price, these things are constantly calling capital, paying back capital and you’ve got to be able to manage that.”
The room full of the industry’s most influential researchers were asked via a poll whether the use of private assets amongst the advisers they supported would be the same, less or more in five years.
Some 60 per cent of respondents voted for an increase in five years with only 13 per cent voting for a decrease in the use of private assets and alternatives.
But a second question to the room that asked attendees which alternative strategies are advisers and their clients showing the most interest in found 59 per cent voted for private credit, with zero per cent voting for hedge funds, venture capital or natural resources and agriculture.
Some 15 per cent voted for digital currencies with 19 per cent choosing infrastructure.
