Fund giants aim to bring private markets to retail investors – but mind the risks
OVER the past couple of years, the private lending segment of unlisted assets has garnered much attention, along with the rest of private assets. What’s not to like? At a time when banks are constrained in their lending, private debt can be a lifeline for companies.
For investors who are typically institutions, family offices or wealthy individuals, the asset class offers an attractive yield and a means to diversify portfolios. The debt is also typically pegged to floating rates, making it attractive in a rising rate environment.
As for private equity, much is made of the illiquidity premium which may be reaped by those who can afford to tie up their funds for years. After all, as more companies stay private longer, access to private equity gives investors the opportunity to get in almost at basement level, raising the potential for juicy returns from promising themes.
Private markets’ next frontier is retail investors, it seems. For asset managers, the obvious prize is the potential assets they can raise and the higher margins in fees – a boon at a time when fees are under intense pressure.
Some of the biggest names in fund management are muscling into this space. BlackRock’s acquisition of private markets data provider Preqin, for instance, has raised expectations regarding its ambitions.
The fund giant manages over US$10 trillion in assets. Private or illiquid assets are just 1.3 per cent, or US$138 billion, of assets under management as at end-June, but their share of revenue and fees is 6 per cent. BlackRock has also acquired Global Infrastructure Partners and a private debt firm, Kreos Capital.
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It shouldn’t come as a surprise, then, that BlackRock has teamed up with the Partners Group to offer a “multi-private markets portfolio solution”. It claims this will be the first in the US wealth market to enable access to private debt, equity and real assets in a single portfolio. Capital Group has also tied up with KKR to roll out “hybrid public-private” funds targeted at the mass affluent segment.
Even more interesting is news that Apollo Global Management is partnering State Street Global Advisors to bundle private credit into an exchange-traded fund (ETF). The fund is expected to be invested mostly in investment-grade debt. To be sure, the liquidity mismatch between an ETF with daily liquidity and private credit is not lost on observers. The private debt exposure may well be indirect via derivatives.
Wealth advisers will surely welcome these developments, which open up yet more options for clients and a lucrative source of fees.
But the retail investing landscape is a different kettle of fish altogether. Unlisted assets are less transparent, valuations are infrequent and liquidity is limited, if at all available. Bundling them into ETFs, for example, is surely groundbreaking in terms of opening up access for all. But the fallout should there be a crisis in debt and equity markets, where spreads balloon and liquidity – already limited in private assets – completely dries up, is untested.
Most countries limit retail investors’ access to private markets. But access to a plethora of restricted investments via offshore brokers is easy in a market such as Singapore. There is an obvious need for education on the risks of illiquid assets for the wider audience. Still, in the absence of regulatory guard rails, the “buyer beware” principle rules. Individual investors should tread with care.
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