Investors crank up private market assets in class-allocation evolution
Private equity, private debt, real estate and infrastructure are becoming mainstream investments, writes Rudigor Kleyn
Private market assets such as private equity, private debt, real estate and infrastructure are becoming mainstream investments with global institutional investors as they search for return in a sustained period of low stock market returns.
Private market assets refer to those not traded on a public exchange. In the past they were considered too hard to access, opaque or a niche for a particular kind of investor, but now they are accepted as an attractive means to diversify portfolios, often achieving better long-term returns than traditional listed markets.
It means an asset class-allocation evolution is under way. Investors globally are increasingly opting for more exposure to private market assets, and the decision to allocate to private markets can also go beyond expected returns.
The main reason for choosing various private market asset classes is accessing diversification. Additional reasons may include to act as an inflation hedge, reliable income streams, high absolute returns, sustainable investing goals and accessing emerging markets in which public markets are thin.
Private markets allocation globally can range from 10% to 40% of the portfolio depending on individual investor objectives, conviction in the ability to pick top-performing alpha-seeking managers, risk tolerance and annual cash flow needs. This is in stark contrast to the low allocation SA institutional and pension fund investors have so far allocated to these asset classes.
Global asset owners, from sovereign wealth funds to endowments, have steadily upped allocations to private markets in the hunt for higher returns and to diversify away from public markets because private market asset classes have evolved considerably and are now offering exposure to a broader array of asset classes, industries, geographies and capital claims.
In little more than a decade, global private market assets under management have grown, from $2-trillion in 2008 to about $5.5-trillion in 2019. Assets under management are expected to exceed $8-trillion in 2023. The same asset class availability evolution is taking place in SA as more investment houses enter the private market arena.
The key private market assets are:
- Private equity. Probably the most well-known asset class, as its net asset value has grown more than sevenfold since 2002 globally, twice as fast as global public equities. US private equity-backed companies have grown from 4,000 in 2006 to about 8,000 in 2017, a 106% increase. US publicly traded companies fell 16%, from 5,100 to 4,300, over the same period. Many large investors that had previously stayed away are now allocating to private markets, seeing asset classes such as private equity as necessary for diversified exposure to global growth.
- Private debt. Globally and in SA private debt funds are now filling a financing void for many middle-market and sponsor-owned companies, providing security structures avoided by banks due to changing banking regulation over the last decade. Investors are becoming more familiar with these types of funds and their portfolio allocations have steadily increased in the last decade. Globally, private debt fundraising has exceeded $100bn in each of the last years. In 2009 only $24bn was raised.
- Infrastructure. Private market allocations globally to infrastructure are rapidly expanding. This is due to a secular trend in developed and developing economies. Public and private infrastructure spending — on roads, power, airports, bridges, tunnels, ports, water, and telecommunications — has grown at 4.2% annually in recent years. It is estimated that globally at least $3.5-trillion to $4-trillion of annual investment is required through 2035 to keep pace with economic growth.
From an SA perspective, more and more noise is being made about the renewable energy independent power producer programme, which has been a successful public-private partnership, and that it should be extended to fill the broader infrastructure need for SA.
This might still take some time to take shape, but the government will clearly be looking to the private sector, which is broader than just the SA banking system, to help finance a growing infrastructure need.
In September 2018 President Cyril Ramaphosa announced that the government would set up an SA Infrastructure Fund to transform its approach to the roll-out, building and implementation of infrastructure projects, with a contribution in excess of R400bn from the fiscus over the medium-term expenditure framework period.
Spending is expected to be directed towards provincial and national roads, human settlements, water infrastructure, schools, student accommodation and public transport.
SA investors can now access an array of private market asset classes, which are not meant to replace the investor’s public market allocation to fixed income, public equities and cash but rather to complement it, especially in the current low-return environment.
• Kleyn is MD: corporate and institutional at Ashburton Investments