Do alternatives still have a key role in portfolios?

By Jayson Forrest

In the current environment, is there value in private markets and if so, how do you incorporate them into portfolios? Jonathan Ramsay (InvestSense), Steven Tang (Zenith Investment Partners), and Jason Horn (BlackRock) provide their perspectives on the role of alternatives in portfolios

IMAP Independent Thought Conference Fixed Interest

Not typically the first asset class advisers think of when constructing client portfolios, the appetite from investors for alternative assets (such as private equity, private debt, and hedge funds) is steadily increasing. Over the last 12 years, the private equity sector alone has grown rapidly, with industry data showing assets under management standing at USD$9.1 trillion as of June 2022.

“There are fewer public companies today to invest in, with more companies choosing to stay private for longer,” says Jason Horn — Managing Director — Head of BlackRock’s Alternative Investment Strategies, Australia and New Zealand. “And there is a lot more allocation of capital into these private companies prior to listing. This is creating a disparity between public and private markets. Compared to the last 10 years, there is now a lot more value locked up in private equity, which we believe will continue.”  

Speaking at the 2023 IMAP Independent Thought Conference in Sydney, Jason says the private markets story is compelling, with the combined sector expected to reach USD$23 trillion in assets under management by 2026.

“Over the last five years, private credit has proliferated in Australia,” says Jason. “There are also strong real estate opportunities, particularly in sectors like childcare and healthcare. We feel that within the private equity sector there are going to be huge opportunities for investors over the next 4-5 years — both locally and globally.”

According to the findings of the BlackRock 2023 Global Private Markets Survey, investors are adding private markets to their portfolio allocations for a variety of reasons, including: income generation (82 per cent); capital appreciation (60 per cent); and risk diversification (42 per cent).

“Given the volatility in public markets, private markets are increasingly attractive to investors,” says Jason. “All the sectors in private markets — like infrastructure, private credit, private equity, and real estate — are increasing. In general, there’s a lot more interest in private markets today, which enhances an investor’s overall exposure to public markets within a portfolio.”

However, looking at the Australian landscape, Steven Tang, CFA — Head of Consulting at Zenith Investment Partners — believes there remains a gap in the unlisted infrastructure space for investors. “I can’t even think of a product available in unlisted infrastructure,” he says. “However, we are seeing a proliferation in private equity, with a lot of investor interest in this space.”

Jason Horn — Managing Director — Head of BlackRock’s Alternative Investment Strategies, Australia and New Zealand
Jason Horn - BlackRock
Jonathan Ramsay is Director at InvestSense
Jonathan Ramsay - InvestSense
Steven Tang, CFA is Head of Consulting at Zenith Investment Partners
Steven Tang, CFA - Zenith Investment Partners

Given the volatility in public markets, private markets are increasingly attractive to investors. All the sectors in private markets — like infrastructure, private credit, private equity, and real estate — are increasing. In general, there’s a lot more interest in private markets today, which enhances an investor’s overall exposure to public markets within a portfolio

Jason Horn

You need to do your due diligence… You need to look under the hood and ask all the right questions. You need to be confident with the manager you use, the experience of the team and its ability to manage assets, and the processes used. They’re all fundamental parts of investing.”

Steven Tang, CFA

Opportunities and challenges

BlackRock sees relative value across private markets. In particular, it highlights four sectors and identifies opportunities within each:

* Private equity — lower entry valuations; high-quality businesses; and resilient businesses and structures.

* Private credit — attractive risk premia; increased role in providing capital; and strong downside protection.

* Infrastructure — strong megatrends driving this sector; inflation protection hedges; and supportive government policy. 

* Real estate — strong fundamentals; long-term structural trends; and value-ad.

However, along with these opportunities, Jason concedes there are challenges for investors when investing in private markets. He also acknowledges that for private clients, it can be difficult to access private markets. Research from BlackRock uncovered a range of barriers to investing, which includes:

* 49% — illiquidity/capital lock-up;

* 41% — internal stakeholder buy-in;

* 32% — expertise of/comfort with asset class;

* 27% — ability to deploy capital; and

* 21% — valuation issues.

According to Jason, another challenge for investors are the four main differences between private and public market assets when building portfolios. In relation to private markets, these discrepancies are: illiquidity (positions cannot be quickly and reliably sold); opaque valuations (mark-to-market valuations occur infrequently and irregularly); limited access to data (it is generally difficult to obtain data on private market transactions); and implementation (in private markets, translating target allocations into actual exposures is likely to take time, and need regular revision as investments realise).

“Whilst there are challenges investing in private markets, we are seeing more platforms come to market with offerings that make it easier for investors to access private markets. This should help improve the accessibility of private markets to investors,” says Jason. 


Advisers need to be able to present various scenarios to their clients about how alternatives will perform in different settings, like in a recessionary environment. By doing so, they will be able to better ascertain if their clients are comfortable with these scenarios.”

Jonathan Ramsay

Whilst there are challenges investing in private markets, we are seeing more platforms come to market with offerings that make it easier for investors to access private markets. This should help improve the accessibility of private markets to investors

Jason Horn

Do your due diligence

Looking ahead at the next five years, Jonathan Ramsay — Director at InvestSense — believes that for investors to become more comfortable with allocating additional capital to private markets, better education is needed. He says this will enable investors to have a greater sense of what could go wrong with their allocations.

He also believes that for investors to be more comfortable with the private markets sector, they need to be at ease with the real estate market, because so much capital is invested in this segment of the market.

“Advisers need to be able to present various scenarios to their clients about how alternatives will perform in different settings, like in a recessionary environment. By doing so, they will be able to better ascertain if their clients are comfortable with these scenarios,” says Jonathan.

“However, I don’t feel the type of data and information you need to enable that to happen is readily available from many private market products. So, from an adviser’s perspective, it comes back to investment due diligence, and then being able to effectively communicate this back to the client.” 

Steven agrees: “You need to do your due diligence. You want to know that the investment team has experience in doing what they say they are doing. In Australia, we really haven’t seen private market teams work through a recession. I’d be reluctant to use a team until I see them work through an issue and see what actually happens as a result. I need to be confident that investment teams can work through various economic and market conditions, including the type of path they map out from those conditions.

“So, you really need to look under the hood and ask all the right questions,” says Steven. “You need to be confident with the manager you use, the experience of the team and its ability to manage assets, and the processes used. They’re all fundamental parts of investing.”

About

Jonathan Ramsay is Director at InvestSense; and

Steven Tang, CFA is Head of Consulting at Zenith Investment Partners.

They spoke on ‘Do alternatives still have a key role in portfolios?’ at the 2023 IMAP Independent Thought Conference in Sydney.

The session was moderated by Jason Horn — Managing Director — Head of BlackRock’s Alternative Investment Strategies, Australia and New Zealand.

Contact us

Email
This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Phone
0414 443 236