Investing into private markets would improve portfolio quality and returns
Doing so will offer investors an opportunity to improve their risk-adjusted returns and diversify away from public markets, says iCapital’s Marco Bizzozero
RISING interest rates and inflation, as well as the ongoing war in Ukraine, have sent public markets into a tailspin in 2022, and it is especially in such an environment that high net worth individuals (HNWI) should continue allocating investments into private markets to improve the quality of their portfolio, said Marco Bizzozero.
The head of international at iCapital, a financial technology platform that facilitates alternative investments, added that this will offer these investors an opportunity to improve their risk-adjusted returns and diversify away from public markets.
Among the various types of investments, Bizzozero said the current valuation reset in private equity offers attractive investment opportunities to build up long-term private equity allocation.
“History tells us that investing in private equity following declines in the public market has historically been a good strategy.
“Private equity funds have shown a stronger resilience during market downturns, outperforming public markets,” he said.
Other alternative investments, such as infrastructure and real estate, would also improve the inflation resilience of investors’ portfolios.
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HNWI’s allocation into private markets is less than 5 per cent on average, which Bizzozero deemed as under-allocation. The allocation among institutional investors, in comparison, is much higher at between 15 and 30 per cent.
High minimum investment amounts, difficulties in accessing wealth managers, a cumbersome investment and transaction process, as well as the lack of transparency and education are some legacy issues that have limited individual investors’ venturing into this space.
Bizzozero believes iCapital’s technology solutions can help connect wealth managers and their HNWI clients, with asset managers.
Users have to subscribe to the platform to execute investments, where the transaction will be automatically processed, and they will be able to view performance reports and the fundraising process.
Even before the volatility seen in public markets this year, investing in private markets had been growing in importance, amid a shrinking number of listed companies since the turn of the century.
“Companies stay private for longer and most of the value creation, therefore, is created outside the public market. The lifetime pre-IPO (initial public offering) is much longer than in the past,” said Bizzozero.
A report jointly produced by iCapital and management consulting company Boston Consulting Group found that HNWIs will account for more than 10 per cent of all capital raised by private equity funds by 2025, and the total assets under management of these investors in private equity will rise to US$1.2 trillion – 2.4 times more than today.
This growth will be driven by HNWIs in Asia Pacific, who will account for 37 per cent of total HNWI allocations by 2025, up from 27 per cent in 2020. Capital commitments are expected to grow at a compound annual growth rate of 26 per cent.
As at Aug 31 this year, US$32.7 billion of the US$138 billion in global client assets on its platform is from investors outside the United States, said Bizzozero. A “big portion” of the US$32.7 billion comes from Asian investors. He said that Asia is of “key strategic importance” in iCapital’s global plans, and it is planning to grow the team in this region.
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