Recent years have seen a marked change in demand for private market investing, not least due to the impact of market volatility and geopolitical unrest on short-term investment returns. A series of reports from various management consultancy firms have forecast a shift of some $4 to $6tn into private markets between now and 2025.
However, despite pent-up demand from the high net worth individual (HNWI) and small investor space for long-term investment opportunities such as private equity (PE), there were several barriers in the way of this sector being able to successfully access private markets.
Volatility and the current geopolitical landscape are influencing small institutions and their ability to make investment decisions. Volatility means companies are distracted by the ups and downs of the markets, and they may lack the time and capacity to think more strategically about investing for the long term.
Coupled with that, the decline in valuation of some publicly listed companies is creating the ‘denominator effect,’ in which investors can become overexposed to private markets. This restricts the ability to commit further capital, according to Titanbay’s head of investments, Alex Bozoglou, making the need to manage exposure more important.
Beyond the denominator effect, volatility has also seen a rise in rapid fundraising. This crowded market makes it harder for institutions to make decisions about funding. Bozoglou says: “This might include needing to cut managers to reduce their exposure, or to engage in secondary transactions, selling old commitments in order to be able to react.”
In volatile markets, you absolutely need to have those diversified portfolios to ensure that you can ride out the storms that come from time to time
Solving the challenges imposed by volatility requires a need for portfolio diversification and a reliance on assets that are less cyclical in nature, he adds. “Private equity is a long-term asset class and that’s an advantage, because it takes away that short termism. Smaller investors should increasingly be taking a long-term view and ensuring a sustained and, if possible, growing allocation to private markets year after year,” Bozoglou says.
Creating a portfolio that is diversified, and takes a strategic, long-term view can enable companies to look beyond specific geographies or sectors. By answering questions around value, growth potential and possible returns, portfolio construction takes a longer view and is less susceptible to market volatility.
A long-term investment strategy should be planned carefully in order to avoid risk. “In volatile markets, you absolutely need to have those diversified portfolios to ensure that you can ride out the storms that come from time to time,” says Adam Harrison, chief commercial officer at Titanbay.
He says illiquidity is one of the aspects of private market investing that can help investors think and plan for the long term. “Long-term planning is a factual necessity of private market investing and allows the private market components of the portfolio to be able to outlast short- and medium-term storms that happen in the market,” Harrison says.
Harrison says: “Our view is that private equity will continue to perform extremely well, because PE is nimble, agile and can effect change. But we believe that there is a cohort of general partners (GPs), of managers, that can do much better than that and do it more consistently. So, it is our job to really understand the strategies, understand the teams, how well they’re suited, how experienced they are in executing strategies and to also understand the portfolio to make sure the portfolio maps and matches what is said about the strategy. That’s very, very important.”
Because of the current level of volatility in the marketplace, the long-term strategic approach is becoming more accessible to small investors, particularly HNWIs, single-company pension funds, family offices, charities, endowments and the like. The appetite is there to mirror the investment strategies – and returns – of the larger institutional investment funds.
Private equity and the smaller investor: key considerations
Portfolio construction
It is essential that smaller institutions plan their portfolio construction in the same way that larger institutional investors would. It means really thinking about all the components of private market portfolio construction and understanding what the end goal is for your portfolio.
Market trends
Understanding the best trends being seen in the marketplace and being selective in which ones to pick up on and utilise.
Diversification
This entails not just focusing on private equity but at all private market asset classes. Smaller investors need to ensure that they’re building a portfolio which has exposure to a variety of different return profiles that should perform differently depending on the prevailing market environments.
Q&A with Alex Bozoglou and Adam Harrison
Titanbay’s Alex Bozoglou, head of investments, and Adam Harrison, chief commercial officer, discuss why ensuring that smaller investors are able to access private market investments has never been so important
Have you seen any notable change in the levels of interest from small investors or the types of conversation you are now having with them?
AH: Yes, this was one of the main motivations behind the launch of Titanbay in 2019. My background is in asset management, servicing institutions, wealth managers etc. For a number of years now, I’ve seen a significant increase in demand coming from that client base for private market investing. One of the drivers behind this is that the risk/return profile of private market funds is very attractive relative to traditional asset classes. Private markets do provide true diversification which has been difficult to achieve in the traditional, balanced portfolio and this has led to increased demand for alternative assets, specifically private markets that offer real differentiation.
Why is manager selection critical to the success of the investor when it comes to private equity?
AB: Manager selection is a multifaceted thing. Historical track records are important. Investors should be looking for a strategy that has a sustainable competitive advantage. Hopefully you will be in areas and sectors that have secular long-term tail winds that are less correlated to the macro, GDP etc. This can include technology, healthcare – these are important structural trends that will not change, even if we are faced with more turbulent times. Being in the right space is really important.
Next, investors should be asking about the manager’s sustainable competitive advantage. By that, we mean that they are able to add more than just capital; capital is abundant. What we look for are those managers who can actually effect change within a portfolio, accelerate growth, consolidate fragmented markets, execute on complex transactions and add value. We look for those skills and the manager’s ability to do that consistently.
There is also a significant disparity of performance between the top tier private equity GPs and the rest of their peers. Given the higher risk/returns attached to the asset class, it is critical to have access to the very best performing funds and strategies. It is also critical to be able to build a bespoke portfolio of investment strategies that match an investor’s specific time horizon, liabilities and investment objectives, which can vary greatly whether you are a single company pension fund, a family office or a charity.
What is the importance of robust data and analytics tools? Is that especially important in the current landscape?
AB: Our mission is to bring institutional quality to smaller investors, both when it comes to access to those top-tier opportunities, institutional-level quality access and to institutional-level quality diligence. That’s something that we do not compromise on. The way we work is the same way that large institutional investors will work.
When it comes to looking at the data, what should investors be looking for? We do not stay at the headline numbers, that is not enough. Our approach is to understand the portfolio and what’s driving value. What’s really important is to make sure that the way that value is being created adds up with the strategy; we’re looking for a sustainable, consistent methodology. We are looking for companies that are growing, developing and doing so in a sustainable way.
Investors need outstanding data and analytics tools, and this is only reinforced in a more uncertain economic environment
When it comes to our platform, we want to enable and digitise as much as possible. Our investors who are on the portal have access to the same tools that are also available for larger, institutional clients. Private markets are not as transparent as public markets and comparing performance from fund to fund and between strategies ahead of making an investment decision can be overwhelmingly complex.
Monitoring the performance of an individual portfolio in real time is also more difficult in the absence of a share price, while monitoring cash-flow movements in a private market’s portfolio is complex given the uncertainty over timing of both capital calls and distributions. For all these reasons, investors need outstanding data and analytics tools, and this is only reinforced in a more uncertain economic environment where a portfolio position can move quickly.
What makes Titanbay stand out in the current market? Why should small investors choose Titanbay?
AB: This part of the market is very clearly underserved. At Titanbay, our difference is in our dual approach, so leading with the high-quality GPs, the over-subscriber situations, situations that large institutional investors want to be in, yet never compromising on quality. The other pillar of our thinking is to create a well-constructed portfolio that goes beyond just the basics of looking at geography and sector, but one which creates something over a three-to-five-year period and is well placed to withstand shocks. We also want to educate, and we want people to think about this exciting asset class in the fullest possible way.
Even in the institutional space, there is a lot of work which is costly and cumbersome, with many unnecessary manual processes. Our approach is to do this in a digitally enabled way and for users to reap the benefits of the technology. From subscription all the way to the back-office functions, we make the entire process as seamless as possible. That’s something that our whole industry needs, not just at the smaller end of the market but even at the larger institutional investor level as well.
A further differentiator is our relationship with Mercer. Mercer is one of the largest consulting groups in the world and our partnership with such a large firm is really important for us. When it comes to the investment side, we have access to the market-leading analyst research that Mercer can produce, which is a very powerful resource for our platform. Mercer also has a strong ability to secure preferential terms with funds due to its size and our relationship with Mercer allows us to make use of those favourable terms, allowing us to bring costs down. That’s really, really powerful when it comes to producing a truly efficient and cost-efficient solution for our clients and that benefit is quite unique.
AH: It’s the combination of two things that sets Titanbay apart: our investment proposition and our platform technology. We have some of the most experienced private market investors on our investment committee who have been through multiple macro-economic cycles. We can offer smaller investors a selection of carefully curated, best in class private market funds for each vintage year. We bring this to investors through a platform that removes the administrative burden, educates and informs decision making.
For more information please visit titanbay.com
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