Private client wealth managers have had robust arguments for allocating to private assets for some time. By 2021 four in five UK wealth managers had invested a portion of clients' money in private assets.1
These allocations are typically made in pursuit of enhanced performance and diversification, arguments that historic data continues to support. But other factors, such as the emergence of new vehicles for private asset investments, and the declining number of publicly quoted companies, are also driving the trend.
Investors are also watching the investment landscape shift and assessing how resilient portfolios will be to a much-altered environment. Of the major themes unfolding – like artificial intelligence and the renewable energy transition – many require private capital backing.
How robust are the return and diversification arguments?
Past performance for numerous private asset classes compares favourably with liquid investment types, like traditional equities and bonds, over longer investment horizons.
Crucially, private markets also have a history of performing differently to liquid markets.
Measuring how different investments move relative to one another – the correlation – is crucial to creating meaningful diversification. Again, data indicates that private assets can contribute to portfolio diversification.
What do the numbers mean?
A correlation of 1.0 (technically the "correlation coefficient") means two assets move in exactly the same way. Smaller numbers indicate lower correlation.
James Ellison, Head of Private Assets Data Insights at Schroders Capital, explains:
"Private market investments offer a compelling means of diversifying a portfolio. The correlation between private asset classes and public markets is lower - as shown by the table. This allows them to provide diversification benefits by moving independently of the public markets.
"As well as behaving differently to public markets, they tend to behave differently to each other; well-balanced private asset portfolios can help mitigate risk. Additionally, the investment strategy itself can create further diversification, such as private equity investing in the lower mid-market."
Public markets offer shrinking opportunity to access growth investments
Another compelling argument, and a key reason why investors are increasing allocations to private markets, is that while capital being deployed into private markets is still growing at a pace, options in public markets have continued to narrow.
The number of listed companies has been falling for years, and not just in the UK. The trend has been echoed in major markets around the world.
In 1996 there were over 2,700 companies on the main market of the London Stock Exchange. At the end of 2022 this had collapsed to 1,100, a 60% reduction. There has been a near-75% fall in the number of UK-listed companies since the 1960s.
Germany has shed more than 40% of its public companies since 2007 and the US has experienced a 40% drop since 1996.
One of the most striking effects of this decline is that the stock market now provides exposure to a dwindling proportion of the corporate universe. This is not just a UK issue: in the US, for example, fewer than 15% of companies with revenue over $100 million are listed on the stock market2. Ordinary savers are largely deprived of the opportunity to invest directly in the rest.
Sources:
[1] Source: The Investment Association, Weaving private assets into wealth portfolios: Evolving structures to meet evolving needs
[2] Ibid
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