Considerations when investing in private markets

Jonathan Ng
November 16, 2022

What factors should new investors consider once they have decided to invest in private markets?  We address market timing and strategies, while pointing out the relevant differences between private and public markets.

Is now a good time to invest in private markets?

This a common question we get from prospective investors and it intensifies during periods of volatility and stress for listed equity markets.

And while we could trot out the adage that “it’s time in the markets” not “market timing” that matters most, it is still a relevant question; investors, understandably, want to avoid investing in an asset that they can’t just redeem at a moment’s notice if the investment performance of that asset turns out to be poor.

But seasoned investors know that there will always be a trade-off between risk and return and there will always be reasons for and against making a new investment that they need to weigh up when deciding whether it is a good time to invest. In the case of private markets, the inability to redeem at a moment’s notice is compensated by improved return potential, diversification and, possible lower return volatility.

In addition, while there is no magic bell that rings to mark the time that it is good to invest in private markets, private market funds have a critical advantage over public market funds (e.g. a listed equity fund) with respect to market timing.

Private markets usually have a four-year investment period that puts the timing decision in the hands of the fund manager. This means that the fund manager has the flexibility to decide when, over that four-year investment period, is a good time to invest in a particular asset.

In contrast, the decision of when to invest in a particular asset is largely in the hands of the investor of a public markets fund. This is because the investment guidelines for the typical public markets fund requires the manager to fully invest the cash received from an investor.

In other words, private market funds take the market timing decision out of the hands of individual investors and into those of the professional fund managers.

So you’re happy to give the responsibility of market timing to the private markets managers, but how do you implement that decision?

Each individual will have specific circumstances that need to be considered (and we suggest seeking professional advice) but a reasonable approach is to establish a long term strategy and stick to that strategy. Having a long term strategy in place eliminates that need for short term investment decisions that could potentially be influenced by emotions and therefore, more likely to result in sub-par investment performance.

A general long term strategy could be as simple as committing a set dollar amount each quarter to a different private markets strategy until you commit the total desired amount. Then over time as an investor starts to receive cash distributions from the private markets funds (which can occur as early as two years into the life of a fund) they can either reinvest it in a similar strategy, commit it to a different strategy, use it to meet a capital call for another strategy, or reallocate it to another asset class if they need to rebalance their portfolio.

This programmatic approach is particularly relevant to private market funds because typically they have a finite term and investors have to think about committing and reinvesting distributions to maintain their overall allocation to private markets. Whereas public market funds don’t have finite lives, and while they can pay distributions, investors have to request a redemption in order to receive their full capital back.

What other considerations do investors need to think about when implementing their decision to invest in private markets?

Investors should seek to construct a private markets exposure that is diversified across, strategies, asset classes managers, styles, geographies, vintage years etc.

Being able to get diversification for most individuals can be tricky given the minimums for top-tier managers are typically at least US$10 million. However, there are opportunities available with minimums of around AU$75,000, including through our portal, which will allow more individuals to construct a well-diversified portfolio.

If as Warren Buffett says, ‘the most important quality for an investor is temperament, not intellect’, then perhaps having a plan and sticking to it can make the biggest difference over time. The features of private market funds can help an investor avoid potential pitfalls of tactical or behavioural errors driven by the temptations to react to current events.  Understanding how private market funds work may give you the edge when it comes to constructing your investment portfolio for the long term.

For more information about our available private equity funds, please visit our private equity funds page.

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