By Jayson Forrest
Jason Huljich (Centuria Capital), Andrew Lockhart (Metrics Credit Partners), Daniel Choo (Russell Investments), Alex Donald (Ironbark), and Chris Ogilvie (Invest Blue) consider potential issues in going down the private markets path
With most superannuation funds already invested in private markets — like venture capital, private equity, private debt, infrastructure, and real estate — it’s not surprising that demand for access to these assets in a managed accounts structure continues to gain momentum. And why not? Private assets provide investors with a range of exposures depending on the risk/return, cash flow and correlation characteristics they are seeking.
Alex Donald
Ironbark
Andrew Lockhart
Metrics Credit Partners
Chris Ogilvie CFP®
Invest Blue
Daniel Choo, CFA
Russell Investments
Jason Huljich
Centuria Capital
We’re starting to see demand for private markets in the managed accounts structure. Currently, the way investors access private markets in a managed accounts structure are as satellites through pooled vehicles, like wholesale funds. But we’re seeing huge demand for the ability to integrate private markets in managed accounts, particularly in the advice space
“We’re starting to see demand for private markets in the managed accounts structure,” says Alex Donald — CEO of Investment Solutions at Ironbark. “Currently, the way investors access private markets in a managed accounts structure are as satellites through pooled vehicles, like wholesale funds.
But we’re seeing huge demand for the ability to integrate private markets in managed accounts, particularly in the advice space. Advisers are competing against industry funds, which already enjoy a considerable exposure to private markets, which the advice industry would like to replicate.”
Speaking at an IMAP Independent Thought Roundtable on private markets, which was hosted by Russell Investments, Alex believes between 10-20 per cent of retail/wholesale focused portfolios will end up with an allocation to private markets, and given the growth of managed accounts, he says this structure is well placed to deliver this exposure.
However, he concedes that to gain that type of exposure presents a few challenges, particularly in terms of platform functionality, like automatic rebalancing, that first needs to be resolved. And there’s also the componentry parts of managed accounts that need to be considered, like liquidity profiles and notice periods.
“At the moment, managed accounts for private markets are wholesale-only. I think the nirvana for us is to try and build managed account private market portfolios in the superannuation environment,” says Alex.
However, he adds that developments in technology and platform functionality to accommodate private markets in managed accounts is happening. Alex believes the technology to re-balance portfolios (for example, quarterly or six-monthly) that have an exposure to private markets, is largely already available on platforms.
But he says platforms will only switch on this functionality when there is sufficient demand for them to do so.
“Ironbark has already built a wholesale-only quarterly liquid private markets SMA with Drummond Capital Partners on the BT platform,” says Alex. “In order to do that, we had to work closely with the platform to turn off certain functionalities to make it work.
But in a superannuation environment, it’s not just about functionality. You also need to deal with APRA’s definitions of liquidity, which is something to be mindful of.”
From our perspective, managed accounts is an obvious space for the mass affluent to be in. But it does need every part of the ecosystem — platforms, responsible entities, investment managers, regulators, and advisers — coming together to make this work. If we can make this happen, it really will move the dial for many Australians
The Holy Grail of investing
Ask Chris Ogilvie CFP® - Head of Wealth Management and Financial Adviser at Invest Blue — for his views on managed accounts and he is also a “massive proponent”, believing this structure will play a key role in the future of advice.
He says the Holy Grail for advice will be taking the benefits of private markets and bringing them into a managed accounts structure not just for high-net-worth (HNW) clients but also for mass affluent retail investors.
“Why aren’t these retail investors getting access to the same opportunities and benefits in their portfolios that ultra HNW investors are getting? I believe it’s critical to have managed accounts in the super and pension environments. This will allow all investors to access the same or similar investment opportunities, based on their risk profile and understanding of private markets.”
Chris believes the challenges around illiquidity and the issues that can occur in the private markets space are all well understood, but by appropriately addressing these challenges, it will unleash significant opportunities for all stakeholders.
“From our perspective, managed accounts is an obvious space for the mass affluent to be in. But it does need every part of the ecosystem — platforms, responsible entities, investment managers, regulators, and advisers — coming together to make this work. If we can make this happen, it really will move the dial for many Australians.”
However, Chris acknowledges that in going down the private markets path with managed accounts, the industry first needs to tackle a range of issues — from liquidity and access to deal flow, through to regulation and leveraging opportunities in both domestic and global markets.
According to Alex, as a responsible entity, Ironbark insists that as part of the portfolio construction process when using private assets, a consultant is involved. He says that’s because the use of private markets requires wrapping an administrative and regulatory framework around assets that are less liquid.
Despite growing investor appetite for private assets, Chris emphasises that private markets are not suitable for every investor. He says these types of assets are only appropriate for the right type of clients, who have the right liquidity profile, with the right assets under management, investing under the right circumstances, and who are working with a trained adviser. This all needs to be supported by the platform and technology.
“Importantly, we don’t want people funnelled into the HNW/wholesale space, when really, they’re just retail investors in how they want to invest,” he says.
On the equity side, you’ve got a situation where the Government is actively encouraging the consolidation of superannuation funds and allowing these businesses to in-house their investment management capability. So, if you’re going to IPO a company in a few years time, you have to make sure you get on well with various CEOs and CFOs of these super funds, in order to have any prospect of raising capital outside of the private environment.”
Listed vs unlisted markets
So, why have unlisted markets grown exponentially, enjoying a steady flow of incoming capital, compared to listed markets?
According to Andrew Lockhart — Managing Partner at Metrics Credit Partners — there are a number of reasons, including the Australian investment market being heavily concentrated in just four domestic major banks. This means there are limited ways in which investors can get access to fixed income or corporate credit opportunities in the Australian market, because most of those assets sit on these banks’ balance sheets.
“And on the equity side, you’ve got a situation where the Government is actively encouraging the consolidation of superannuation funds and allowing these businesses to in-house their investment management capability. So, if you’re going to IPO a company in a few years time, you have to make sure you get on well with various CEOs and CFOs of these super funds, in order to have any prospect of raising capital outside of the private environment,” says Andrew.
“That’s part of why capital is flowing from listed to unlisted markets. Another reason is the reduction and concentration in liquidity. There are disclosure obligations on public companies, and there is a heightened degree of risk for any company in a public market. A public market issuer takes on a whole lot more risk, because of the expectation that both business and market conditions remain the same, however, they are exposed to material risks. For these reasons, it makes it increasingly less appealing for companies to be in the public environment.”
Andrew adds that if you’re buying a company, but it has any degree of uncertainty about its earnings profile, then the investor is likely to get “hammered” in the sharemarket. However, private equity recognises that even if earnings dip for a period, but the fundamentals remain strong, there are still opportunities to invest in a company and grow future earnings. Andrew believes public markets don’t have the same degree of tolerance for when that happens to listed companies.
Offshore private markets definitely provide investors with a wider choice of investment opportunities that simply can’t be found in the local domestic market
And what about private debt?
According to Andrew, unlisted companies typically don’t want their information and pricing disclosed to their competitors. As an example, he refers to the GFC, where people in public markets were looking to identify weaknesses in the debt capital structure of companies as an opportunity to attack them from the equity side. He says as soon as you have increased mark-to-market liquidity risks on your financing, it can expose weaknesses on the equity side.
“So, there’s many reasons why people prefer private and confidential transactions to limit risks,” he says.
Centuria Capital offers both listed and unlisted property vehicles, and Jason Huljich — Joint CEO at Centuria Capital — agrees that listed markets can be challenging for both businesses and investors. However, he points out that real estate is a medium to long-term asset class that requires patience when moving through periods of market volatility.
Opportunities for offshore private markets
When it comes to global opportunities in private markets for Australian investors, Daniel Choo, CFA — Director, Head of Multi-Asset APAC and Senior Portfolio Manager at Russell Investments — believes it comes down to two key points:
1. Access to managers. A global manager, like Russell Investments, has a much greater ability to identify and access opportunities worldwide. “Asset-backed lending, particularly in Europe, is an area that we like. We also like niche private equity in the United States. These are examples of opportunities you simply can’t get in Australia,” says Daniel.
2. Access to insights. Russell leverages its global network to gain valuable insights of opportunities happening in other markets.
“Offshore private markets definitely provide investors with a wider choice of investment opportunities that simply can’t be found in the local domestic market,” says Daniel.
However, there are still a number of challenges that investors need to be aware of when accessing offshore investment opportunities. These include local regulatory and jurisdictional issues, as well as the implications of currency risk and tax leakage.Diversification benefits of private markets
The diversification benefits that private assets bring to a portfolio are many, including helping to manage downside risk and reducing overall volatility of the portfolio. Importantly, private assets are totally uncorrelated to mainstream fixed interest and listed market returns.
“Private market returns are negotiated directly with the company,” says Andrew. “The biggest risk in private credit is the risk of loss of capital in the event of a default. And so, if that’s the biggest risk, then diversification through well-diversified holdings is your key to reducing that investment risk.”
He believes that from a private credit investment perspective, larger and more scaleable vehicles actually deliver value for investors in the form of lower credit risk, lower risk of illiquidity, and reduced costs. He says these are all key features in private credit.
Jason also agrees that exposing a portfolio to areas like REITs and unlisted property provides investors with greater choice in how they diversify their portfolios, while providing a potential safety net against volatility.
Private assets require careful advice
As a financial adviser, Chris doesn’t believe private assets are any more difficult to talk to clients about than mainstream investments. He says most clients can readily relate to investment illiquidity by drawing on their own experiences from having a mortgage, or owning their house, or operating a small business.
While he accepts that most advisers are well equipped to explain the core concepts of illiquidity to their clients, Chris concedes there does need to be an education framework around private markets for advisers (and their clients), which goes beyond a basic and simplistic understanding of these assets.
“We can’t have a situation where advisers are let loose in the private markets space without first having proper education and training about this asset class,” he says. “These assets are complex and do require a higher level of understanding around the various issues attached to private assets, like capital lock-up, and how these issues will affect an investor’s overall portfolio.”
He adds that while it’s easy to sell a good story about private market investments, it’s important for advisers to be able to balance this out by also providing investors with examples of how investing in private assets can also go wrong.
“We all know that when things lock-up, everything tends to lock-up at the same time. Advisers need to be able to talk clients through a scenario where something like this might occur, and ensure that in such circumstances, their clients have enough liquidity elsewhere to draw upon. Private markets need to be carefully advised.”
About
Jason Huljich is Joint CEO at Centuria Capital;
Andrew Lockhart is Managing Partner at Metrics Credit Partners;
Daniel Choo, CFA is Director, Head of Multi-Asset APAC and Senior Portfolio Manager at Russell Investments;
Alex Donald is CEO of Investment Solutions at Ironbark; and
Chris Ogilvie CFP® is Head of Wealth Management and Financial Adviser at Invest Blue.
They spoke on ‘Private markets’ at an IMAP Independent Thought Roundtable, which was hosted by Russell Investments.
The roundtable was moderated by Toby Potter — Chair of IMAP.