Want to invest like the very rich or the big institutions? Then you need to allocate to private markets. So says Alan Merriman, founder of Irish investment house Elkstone, which counts entrepreneurs, institutions, the Irish abroad and the venture capital community among its client base.
Private markets typically involves investment in equity or debt that is not traded on public exchanges – so think of hedge funds, private equity, private debt, property, infrastructure and collectables, for example.
Historically it was institutions, pension funds, high-net-worth people and family offices that made such investments. However, this is changing.
“The reality is that private markets are where the vast majority of global wealth is – and the private person has been locked out of that. But it’s beginning to open up,” says Merriman.
So what are these markets all about? And if targeted at institutions and the very wealthy, how much will you need to get in on the action?
Changing markets
Globally, investment in these unregulated markets is on the rise. Figures from McKinsey show that private market assets under management stood at about $13.1 trillion (€12 trillion) as of June 30th, 2023 – and alternatives house Preqin predicts this will surpass $18 trillion by 2027.
Much of the growth is coming from rich individuals, rather than institutions.
Already in the US, investors at a more retail level are eyeing up opportunities in private markets, and Merriman expects Ireland to follow the trend. “Part of my message is that that’s what the most sophisticated investors are doing already, and Irish investors need to be doing the same,” says Merriman.
He is not alone in his stance. Stephen Schwarzman, chief executive of Blackstone, the world’s largest alternative asset manager, recently pointed out that 90 per cent of companies are privately owned but that “the vast majority of individual investors remain underallocated” to private markets.
To address this, Blackstone aims to “provide individuals access to the same high-quality products that institutional investors have benefited from for decades”. Driving this is a number of investing platforms.
Among these is Moonfare, a Berlin-based digital investment operator. It promises that, through its platform, private equity is “now open to even more investors” – or at least those with the minimum required commitment of €50,000. It suggests a typical hold period of 10 years.
Meanwhile, the World Economic Forum (WEF) suggests that a recent revamp of the European Long-Term Investment Fund framework, for example, could open private markets – with some caveats – to everyday investors.
Investment proposition
Investing in private markets is not all about higher returns. MSCI’s global private capital performance summary for the fourth quarter of 2023, for example, shows that, globally, private capital markets rose by 2.7 per cent – buyout private equity assets were the top performers, up by 4 per cent. Hardly something to write home about.
For Merriman, it’s largely about diversification. Private markets help clients “diversify and expand their wealth”, he says, unlike index tracking funds, which can bring concentration risk.
As bigger companies get bigger – Microsoft and Nvidia account for almost 15 per cent of the S&P 500 – “it’s a real risk,” he says. “Life is full of uncertainty, you don’t want concentration risk.”
This means that “a traditional mix of bonds and equities are not set up for success going forward”, says Merriman, arguing that a traditional 60:40 equity-to-bond split no longer represents an ideal portfolio.
“More often than not, they’re working in the same direction,” he says of the two assets.
“If you’re allocating just to stocks and bonds, you’re relying on luck. You think you’re diversified, but you’re actually not. To de-risk, you need to have a very considered approach to investing,” he says, suggesting that a “healthy focus” on alternatives, along with stocks and bonds, is a better approach.
“It’s a ‘need to have’, rather than a ‘nice to have’,” he says, adding that another issue is that “the right opportunities aren’t publicly traded”.
Indeed, the number of investable companies is in decline. According to CRSP (the Center for Research in Security Prices), the number of US companies listed on big US exchanges peaked in 1996 at 7,300: it now stands at about 4,300.
In his recent letter to shareholders, Jamie Dimon, chief executive of JP Morgan Chase, bemoaned this trend, noting that as the number of public companies has decreased, the number of private US companies backed by private equity firms – which does not include the rising number of companies owned by sovereign wealth funds and family offices – grew from 1,900 to 11,200 over the past two decades.
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Challenges
Allocating to private markets should not be done in a haphazard fashion. They pose risks that simply aren’t there with an index-tracking fund.
Liquidity, for example. As the recent report from the WEF pointed out: “Private markets can indeed be more opaque and less accessible than public markets, often including long lock-up periods for investment.”
And they can lack transparency, although this is coming more into line with wider investment expectations with the arrival of private investors.
Earlier this year, MSCI, a global provider of investment indices, tracking equities – most notably the MSCI World index – property, fixed income, and so on, made its move into private markets. It launched MSCI Private Capital Solutions, which aims to offer increased data and analytics in this segment of the market.
Despite the rhetoric, the best opportunities may still be those made available only to ultra-high-net-worth individuals. And even if they’re not – you’ll need a wad of cash regardless.
One of Elkstone’s recent private market deals is its partnership with alternative asset manager Harrison Street to develop more than 1,500 student accommodation beds in Dublin, Limerick, Cork and Galway in the next five years.
Such opportunities are attractive to private clients, says Merriman, as it’s private money commingled with institutional investors. “That’s where people need to be thinking,” he says,
To get in on this deal, Merriman says they would “accommodate” investments of €100,000, but it doesn’t have to be so much.
“Even at €100,000, you could build a very sophisticated, balanced, diverse portfolio, with a healthy allocation to private markets,” says Merriman.
That is still beyond the means of many, but he can see the level of required investment coming down. And he says the State could play a role in this.
Earlier this year, then minister for finance Michael McGrath spoke of the introduction of a new savings structure to put the billions of euro lying in deposit accounts earning negligible returns to “more productive use in the economy, investing in structures that help to fund and support early-stage and innovative businesses”.
“I’d love to see it,” he says, of McGrath’s proposal, adding that Elkstone would like to play a role in facilitating this.
“We’d love to have that opportunity,” he says, adding that they would be keen to build the “right product” for Irish investors.
And if your portfolio is more yellow pack than blue chip, don’t despair. Merriman suggests some proxies to get access to private markets. You could invest in shares in the publicly listed Blackstone, for example.
“It’s not pure private equity, as you’re investing in a private equity company, but it’s partly addressing it,” says Merriman.
Or for something more “exotic”, how about litigation finance? Merriman suggests Burford Capital, which is listed on the New York and London stock exchanges.
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