All strategies work – until they don’t. While the hottest ticket in town is still private credit, is it everything it’s cracked up to be?
In Cliff Asness’ latest missive, a fictional asset allocator from the future looks back on the decade to 2035 to figure out which assets helped their performance and which hurt it.
How to get a ‘return on time’ in private markets
Historically, private market assets have outperformed listed assets, but that doesn’t mean it’s automatically a good idea to allocate to them, according to Cameron Brownjohn, CEO of private equity manager Federation.
The hype of those returns – and the hype of the private assets boom, where a new fund or manager is launched seemingly every day – means that the individual needs of investors, and the question of whether private assets really meet those needs, can fall by the wayside.
“So far at this conference, I’ve heard that if you invest in private markets you should be able to achieve a higher rate of return than the listed markets and/or achieve a lower risk for the same level of return,” Brownjohn told the Inside Network’s Alternatives Symposium. “And that would apply to what I’ve heard around the private credit industry, as well as from various private equity practitioners. They’re all coming at the thing from different angles, but there’s a broadly similar pitch.”
“But if I’m in wealth management, I’m thinking ‘that’s all very good – what about liquidity? What about transparency? What about the fact that I know I can buy BHP and I’ve been doing that for 20 years?’”
There’s a “return on time” perspective too. The Future Fund has a massive allocation to private markets, and vast teams dedicated to understanding the ins and outs of that allocation. But if an investor wants a tiny sliver of their portfolio in private markets assets, does that amount really justify grappling with the liquidity and lack of transparency that can come with them?
“Do you need all of your money to be liquid? How much of it doesn’t need to be liquid? Is it a fraction? Is it a quarter? Is it, in the instance of the Future Fund, 45 per cent? The Harvard Endowment, which has 77 per cent? If it’s only 5 per cent, can you be bothered?”
“And then you have to understand the change that needs to be made to your business as you scale up into private equity or private credit or secondaries or something else. There are a range of products that can give you a modicum of liquidity. It’s not going to be the same as owning NAB shares – you can’t sell them whenever you want. You will have a capped amount of liquidity.”
But when the decision is made to allocate, there’s a huge pipeline of opportunities to look at. Most businesses don’t sit on listed markets, and the investment universe expands significantly if you’re willing to sacrifice liquidity. Still, it pays to be selective, and Federation has only bought one business this year – Homesafe, which buys a fractional interest in homes to allow people to access the latent equity in them without taking out a reverse mortgage.
“We really like that business because we think residential real estate is Australia’s largest asset class by a mile. The aging population is also a thematic that isn’t going anywhere anytime soon. And we like having a downside protected bet on house price growth, and we reckon we can industrialise that and bring it to more and more investors.”
“That’s the only investment we made this investment was made after sifting through a great many. I don’t know how many – we have pitch books that talk about one per cent of the deals we find.”
Federation is good at “anything” around the aging population, sustainability and digitisation, and has also built Australia’s largest childcare and disability housing REITs with backing from the likes of BlackRock, KKR, HESTA and Ramsey Healthcare.
