Jack Wasserman of Schroders Greencoat discusses the potential upside – and risks – of an allocation to private assets.

As an investment opportunity-set, private assets have been around for a long time in institutional portfolios, as well as the more sophisticated family offices. This trend is growing into new areas, such as private wealth. Management consultant Bain & Company, for example, has suggested that, by 2032, around 30% of global assets under management could be in alternative investments, with a significant chunk in private assets. For its part, JP Morgan recently published a family office survey that shows a 45% average allocation to private assets.

There is no denying, however, that a wider pool of investors is now able to access private markets and, as a result, greater education is needed. Private markets are here to stay, and we expect them to play a bigger role in our investment landscape moving forward.

What is the case for and against the main private asset categories?

There is a wide breadth of investment themes available across private markets, which you can’t get in public markets. As an example, around 90% of companies in the US are private, which means there are fantastic opportunities to invest in sectors like healthcare, AI financing and the energy transition, which have a broad base across private markets.

When considering those four principal categories of private assets – private equity, private credit, real estate and infrastructure – each comes with its own set of sectors, risk profiles and return potentials. Private equity, for example, has historically delivered outsized returns compared with listed equities, while private credit can offer higher income streams. For their part, real assets such as infrastructure can deliver on both stronger returns and risk reduction, while giving exposure to risk premia that are hard to find in public markets, such as power-price risk. These assets can really help create a more efficient portfolio for clients.

One challenge to consider right from the start is liquidity – or rather, illiquidity. By their very nature, private assets are not traded frequently, so it is critical to approach these investments with a long-term mindset, even if some structures offer limited liquidity options.

How justified are concerns about liquidity and valuation and how can investors guard against the associated risks?

The key concern here would be whether investors understand the characteristics of the products there are buying. Both liquidity and valuation in private assets deserve careful consideration.

By their nature, many private assets are not traded frequently, making it challenging for investors to access their capital quickly, if needed. Unlike public equities or credit, which can be sold almost instantaneously, private investments often require a longer commitment, meaning your capital could be tied up for years. Valuation is another critical area of for investor due diligence. Determining the fair value of private assets can be complex, given they often lack readily-available market prices. This lack of transparency can make it difficult to assess the true value of your investment, especially during market fluctuations.

In practical terms then, how can investors guard against these risks? Here is a short checklist:

• Position sizing is key: While family office average allocations tend to be around 45%, we are seeing the wealth market for suitable clients comfortable with 10% to 20% in private market illiquid and semi-liquid structures.
• Diversification: By diversifying, you reduce the impact any single asset or sector may have on your overall portfolio.
• Due diligence: A well-managed fund with a strong track record can help alleviate concerns around valuation and liquidity.
• Liquidity management: Especially in evergreen open-ended vehicles, it is important to research how liquidity is managed as this varies across different funds.
• Staying informed: Regularly monitor your investments and engage with fund managers for updates on valuations and liquidity.

While liquidity and valuation are important to consider, the long-term potential of private assets can be worthwhile. It is also useful to remember that liquidity risk comes in many forms. The top 10 companies of the S&P 500 now make up about 30% of the index, while the top 10 in the FTSE 100 account for almost 50%. This reality underscores the value of diversifying into private assets, providing exposure to a broader array of businesses and growth opportunities not available in public markets.

Are retail investors ‘late to the party’?

Not at all. The dynamic we have in the market is still one of a shortage of capital versus the projects and opportunities available. This is creating an environment where both individuals and institutions can benefit from a great entry point.

While I primarily focus on infrastructure, the current market conditions could present a favourable entry point for renewable infrastructure investments. If you think of the capital needed to progress the expansion of AI or to deliver the energy transition, there are simply too many projects relative to the money we have available. Governments do not have the capital, which means returns have to incentivise private capital to deliver on these opportunities.

How does the current interest rate environment affect the outlook for different private assets?

Interest rates can certainly shape the attractiveness of an investment. In private equity, while higher rates might suppress valuations, it is also important to consider that private equity firms can adapt their strategies. Some focus on the small to mid-cap end of the scale where leverage is less prominent versus the ‘mega-deals’ you see on the front pages. Moving into a more stable or even rate cutting environment would of course be beneficial for these investments, but it is not a requirement.

Conclusion

We are at different stages in different geographies. The big global private banks are well developed, however regional or national nuances do exist. In the UK, for example, we are at the beginning of this journey. From the conversations I am currently having, it feels that journey is picking up momentum. 

Private assets offer significant advantages, including higher returns, diversification and a more stable income stream. Thanks to new investment structures and broader acceptance within wealth management, these assets are becoming increasingly accessible to private investors.

Although liquidity and valuation remain challenges, a well-structured approach can help manage these risks. By strategically including private assets in portfolios, investors can benefit from the growth opportunities this market has to offer.

Further reading : Q&A: Why should private assets have a place in private wealth portfolios? by Jack Wasserman, Schroders Greencoat.