Getting the benefits of real assets for retail investors - IMAP Independent Thought

By Jayson Forrest

How necessary are real assets and private equity as a component of portfolios for retail investors, and how can they access these assets? This was one of the questions considered by Dale Holmes (Spire Capital), Robert Talevski (Activus Investment Advisors), and Tom Schubert (Drummond Capital Partners), as they discussed whether real assets and private equity can provide some protection from inflation and market volatility.

The Future Fund could be considered the ‘poster boy’ of real assets and private equity. With a healthy allocation to these asset classes, the Future Fund is a clearly visible supporter in the merits of investing in real assets and private equity.

However, even with rising consumer awareness of the Future Fund and its performance relative to the market, why aren’t we seeing more retail clients gravitate to private equity and real assets?

“It’s a good question,” says Dale Holmes - Director at Spire Capital. Speaking at the IMAP Independent Thought Conference in Melbourne, Dale says there have been periods of time where quality simple hasn’t been available in the private equity space. And with regulators wanting to protect retail investors from more complex investments, the barriers to entry for this asset class have been raised, making it difficult for retail clients to access.

“However, it’s undeniable that there is a growing appetite by retail investors for private markets. As the investible universe in private markets grow, there is a definite move to make this sector more accessible to retail investors, which we are already seeing happen in the United States,” says Dale.

“The issues around liquidity have always been an impediment to long-dated private markets, so we are seeing more monthly liquid solutions coming to the market from the likes of Partners Group and Hamilton Lane and others, and we’ll see a lot more of these types of solutions over the next 12 months.”  

Adding to Dale’s point about access to private markets, Robert Talevski - Founder and Managing Director at Activus Investment Advisors - says because the private equity sector is so popular in markets like the U.S., with a lot of capital chasing private market opportunities, that the sector has become very difficult to get into.

It’s a similar view supported by the Co-founder and Managing Partner at Drummond Capital Partners, Tom Schubert, who adds that investors wanting exposure to the private equity and real assets sectors need to accept the illiquid nature of these types of assets. 

“Unfortunately, if you do want to invest in private equity, you need to be prepared to accept some of their characteristics, like illiquidity. You need to be prepared to accept your capital will be locked up, otherwise, you’ll get unfavourable terms, in which case, you should probably stick to investing in public markets,” Tom says.

According to Dale, the amount of money going into the private equity sector leading up to the recent market correction, effectively meant you did get incredibly “frothy valuations” happening in the mid and large cap end of the market.

“So, when looking at the private equity sector, you really need to do your due diligence around valuation and quality, just as you’d do in the listed market,” he says.

Given the way markets have moved over the last 6-12 months, with considerable swings in both equities and bonds over short periods of time, Tom believes it is reasonable to expect that advisers and investors should be cautious about potentially locking up their capital for a number of years in generally illiquid assets, like private equity and infrastructure. By doing so, he says

there is the possibility that investors might miss out on other opportunities happening in more liquid markets.

“There’s definitely going to be arbitrage between listed and unlisted. And this applies particularly to venture capital and private equity. Investors need to understand what sort of returns they’re likely to experience based on the starting valuations today,” says Tom.

Dale agrees, adding that it’s important to pick the right managers with discipline in their valuation approach.

“The Future Fund always talks about cash being an offensive play. It’s about being contrarian and having cash available to make investment decisions when everyone else is fearful. It’s all part of helping your clients to work out what their liquidity buckets are, how much they can allocate, and how much they can comfortably sit on.”

For Robert, in extreme events, like the ones experienced in 2009 and 2020, it became evident that some super funds did have issues with liquidity. In these extreme events, he says some super funds had to sell their private equity on secondary markets.

“But to do that, they had to give up a 20 per cent discount to net asset value. So, as a super fund, if you’re too exposed to private equity, you may be forced to sell at the wrong time,” he says.

In terms of adding real assets and private equity to portfolios, Tom says Drummond Capital Partners has rolled out a private market opportunities research service for its clients. This is part of the push by the business to try and target very specific assets that it can’t get exposure to in managed accounts, with the aim of running these assets as a complement to its core liquid offering.

Activus Investment Advisors was an early advocate of private equity investing and since 2016, has had a position in Partners Group private equity at about 8 per cent.

“It’s one of the best calls that we’ve made relative to listed, particularly over the last couple of years,” says Robert. “Infrastructure has been another good call we’ve made, with a large allocation to listed relative to market. For us, we’re very big supporters of these asset classes. Our performances have done well, and as a result, we will continue to support them.”

However, Dale believes that in a higher interest rate environment, with less available capital to invest, this will invariably affect the private equity and real assets space.

“When you take cash out of the system, it means there are less investors to buy your asset. Previously, in the low interest rate environment, people were investing for yield, and perhaps buying assets that were income focused and passive. But when inflation and interest rates kicked up, investors suddenly became exposed, because value got switched off,” says Dale.

“When driving value, quality is critical and cashflow is everything. So, right now, if you don’t have the ability to move the needle on operations and cashflow, then you’re exposed.”

Another critical factor of portfolio construction is research, which is particularly essential for illiquid assets, like private equity and real assets, that may potentially lock away a client’s capital for a number of years.

Dale remains confident that in the retail space, as more product issuers come to market, a greater amount of research will be available through providers, such as Lonsec and Zenith.

“For retail investors, the private markets space is becoming better researched,” says Dale. “We’re already seeing more coverage of this sector, which can only be a good thing for advisers and investors.”

Robert agrees: “Increasingly, advisers will be able to access analysis from the research houses. Advisers should also consider asset consultants, who also conduct their own due diligence on top of that research.

“However, the key for any portfolio construction is education. For advisers that means properly understanding what private equity and infrastructure delivers to your portfolios, including their benefits, their characteristics, and their performance track record. This is essential in determining whether these assets are suitable for your clients and their risk profile.” 

Dale Holmes is Director at Spire Capital;

Robert Talevski is Founder and Managing Director at Activus Investment Advisors; and

Tom Schubert is Co-founder and Managing Partner at Drummond Capital Partners.

They spoke on ‘Getting the benefits of real assets for retail investors’ at the IMAP Independent Thought Conference - Melbourne.

The session was moderated by David McDonald CFA - Investment Specialist at IMAP.