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Investors turn the dial to ‘risk-on’ in private markets

By Jessica Penny
3 minute read

Private markets are poised to remain a major asset allocation at institutions and increasingly among wealthy individuals, an investment manager has said.

Private equity has outpaced other asset classes over the past decade, with a 15.1 per cent 10-year return compared with 11.8 per cent for public equities, 9.5 per cent for real estate, and 4.2 per cent for fixed income, according to Hamilton Lane.

Drew Schardt, Hamilton Lane vice-chairman and head of investment strategy and direct equity, has observed individuals steadily enhancing their understanding and confidence in the investable universe and adapting to a “new normal”, particularly as there is more clarity around interest rates.

“It doesn’t mean there won’t continue to be choppiness, but I believe investors are feeling more positive about the current macro-economic environment – certainly, risks from geopolitical and other major events around the world still remain,” Mr Schardt explained.

The sentiment from investors and clients now, he noted, is an increased inclination towards private markets as they look to find ways to turn the dial to “risk-on”.

This was echoed in State Street’s most recent risk appetite index reading, rising from 0.24 in December from zero in November, with long-term investor flows now highlighting a preference for adding risk across asset classes.

“GDP, for example, has exceeded expectations in the US, but that doesn’t mean there’s not going to be pain to come. But I think overall, this is reflected in what you’re seeing in terms of a rebound in the public side, as well as the resiliency of private market asset multiples and valuations,” Mr Schardt continued.

At the same time, he added, investors are becoming increasingly comfortable with private markets and the asset classes’ performance expectations as they become better understood.

“What’s really changed is thoughtfulness around portfolio construction and having more of a top-down view,” Mr Schardt said.

“Should I mix in infrastructure, private credit, other strategies, secondary transactions, for example, that have different risk return characteristics, also in terms of liquidity and duration. Portfolio construction matters, top-down strategy matters.

“Private equity succeeds because it historically performs well over longer, more volatile periods. Decision making is focused on long-term value creation, not short-term swings.”

He attributed this, in part, to boards of directors at private companies often being more empowered, noting the increasing tendency for private-equity-backed boards to swiftly make management team changes when required, which is rarer among publicly traded companies.

Mr Schardt further observed that it has also become easier to invest in the asset class, stating: “While traditional private equity funds have been built for institutional investors with participant thresholds well into the millions of dollars and with their money locked up for up to 12 years, there are newer funds that offer much lower minimum investments.”

“They’re also set up with evergreen structures that allow investors to withdraw some amount of capital on a quarterly basis, as well as make monthly deposits,” he concluded.