Exhausted by expensive stocks and super meager bond yields, asset managers are increasingly looking beyond the public markets in search of decent returns.
This has been building for several years. Already, Schroders points out that private markets are worth something like $8 billion.
But the sharp acceleration in inflation last year is prompting some asset managers to take a first look at assets such as private debt and equities, as well as infrastructure and real estate, or to push more far in space.
“Private markets were once the preserve of wealthy investors and sophisticated institutions. But why does it have to be for wealthy family offices? People talk about democratizing private markets,” said Philippe Lespinard, head of London asset management at Union Bancaire Privée.
For Lespinard, the calculation is simple. Government bond markets are just a “horrible” place. Accelerating consumer price inflation since the world emerged in the blink of an eye from the first round of pandemic shutdowns means buyers are effectively guaranteed a loss on many of these investments.
But it’s not just government bond yields that have received the steamroller treatment. The central bank stimulus that crushed them also drove down corporate credit yields, and some authorities also bought truckloads of corporate debt.
“His [most] noticeable in Europe because the European Central Bank bought investment grade and industrial bonds. They squeezed credit spreads even for good liquid names like Nestlé or Siemens, not that those companies had bad credit,” Lespinard said.
“When you compare European high yield debt – and at 2% or 3% yields, I think we need a new name – but you can lend to private markets with senior funding at, say, property developers for two, three, four, five years for a subdivision at 6, 7, 8%,” he said. “They are good quality and you earn two to three times what you would in the high yield market.”
Stocks are doing well, of course, but they can be volatile and some valuations defy traditional logic.
All of this pushes investors beyond the well-trodden path of simple listed markets and into more adventurous waters. Calpers, the largest public pension plan in the United States with $500 billion in assets under management, has already taken the plunge, with its board agreeing in 2021 to increase its private equity allocation by 5 points. percentage at 13%, and to buy the private debt, putting 5% of his money into it.
Meanwhile, public equity allocations are to be reduced by 50-42%. Public markets are “a bit overheated,” chief executive Marcie Frost told the Financial Times in December.
Of course, many things can go wrong. Otherwise, you wouldn’t earn 8%. 100 on this financing granted to a decent real estate developer. The main concern is liquidity. In a crisis, these are not assets you can sell in a hurry – hence why public markets carry a so-called liquidity premium.
Calpers thinks he can take this in his stride. “We have sufficient capacity to pay benefits in the event of a stock market crash or a fairly significant downturn in the markets,” Frost said. But as private markets attract new fans beyond specialist investors, it’s clearly vital that everyone buying has thought about the trade-off.
“The problem with the democratization of private assets is that a lot of people buy them without really understanding what the liquidity premium means,” said César Pérez Ruiz, chief investment officer at Pictet Wealth Management. “Liquidity is a fantastic thing that you can’t have when you need it. You need to make sure customers are ready to lose it. It’s not a free lunch.
Potentially, having a greater share of global investment parked in private markets could even expose public markets to greater vulnerability. As we saw in the spring of 2020, investors don’t necessarily sell what they want to offload when the going gets tough. They sell what they can sell where they can most easily find a buyer.
Public markets could feel the greatest force of selling pressure in the next big shock, as more of the portfolios are tied up in awkward private assets. May be. But the private markets are probably not big enough for that yet.
Moreover, the lower liquidity of private assets may be less of a problem than it seems. Super-cautious, super-sense pension funds, for example, tie up long-term funds on purpose. Why worry if they can’t get out of a decent private investment by lunchtime? Why sacrifice returns on the altar of liquidity?
The word is circulating clearly. “It’s a question we often get – how do I access private markets?” said Sonja Laud, chief investment officer at Legal & General Investment Management.
The shift to a new, greener global energy mix – an infrastructure-heavy process costing the trillions – means that opportunities are there. For her, however, the problem is that these markets are still too small. “The volumes are not there yet. It’s still a limited pool,” she said.
Maybe not for long.