Private investments play an important role in long-term investment portfolios, and private markets have historically returned meaningfully more than public market equivalent investments.
We classify private markets in three main categories: private equity, real estate, and private debt strategies.
Private equity is an investment in equity securities that are not traded publicly. Public equity stocks are bought and sold frequently and priced daily. Private equity investments are held typically for five to seven years and are priced quarterly. Private equity strategies can be classified broadly as venture capital, growth equity and buyouts.
Real estate is a tangible asset consisting of land and buildings. Real estate investments may target income producing properties where the investor buys an asset (e.g.: office, residential, retail, warehouse, etc.) and leases it. They may also target capital appreciation where the strategy is to develop the property or upgrade it and sell it at a profit. Real estate investment can provide regular income, inflation protection and capital appreciation. You can also invest in publicly traded real estate investment trusts (REITs) that own real estate assets. However, real estate in private markets is less correlated with equities and can add diversification to a traditional portfolio.
Private debt typically entails lending to corporations in return for interest over a defined repayment period. Private debt has become more popular after the great financial crisis as bank lending became restricted by capital adequacy requirements. Private debt investors are therefore paid a premium over bank interest especially when lending over the medium term. With bank deposits paying virtually nothing, private debt is an attractive proposition for investors seeking to protect their income.
In a low-growth, low-return environment, private markets offer higher returns than public markets. In fact, for the past 20 years, returns on private equity, real estate and private debt portfolios were double those of a balanced portfolio with less volatility as private markets are less subject to day-to-day market volatility.
High-net-worth individuals have historically shied away from private markets given that their wealth is already concentrated in their own business or real estate assets. While this exposure needs to be considered, private markets are becoming more popular in capital markets as an institutional asset class in debt and equity issuance. Therefore, an investor who does not participate in private markets will miss exposure to an important segment of the capital markets.
Building a private markets portfolio requires creating a strategy unique to the investor and implementing it.
The strategy design must take into consideration the investor’s assets (traditional investment portfolio, real estate, concentrated asset in a company or stock), liabilities (income required if any, future lump sum needed to pay a specific amount, emergency funds, debt payments, etc.), and duration. Also essential is a careful assessment of the investor’s risk behavior in short- and long-term market movements. The above would determine the appropriate asset allocation for the private markets’ portfolio and set goals for asset growth, income, return expectations, duration, and cash flow requirements.
Implementing a private markets strategy remains challenging for investors. Unlike public markets, information on private markets is not easily accessible. Also, the most successful private market transactions are executed in their own markets, so on-the-ground local presence is essential. Finally, top-tier managers require large commitments that are beyond the reach of mid-sized investors.
At the Family Office, we have been managing private investments portfolios for the past 17 years.
Our financial advisors and portfolio managers work closely with investors to draft the right investment strategy while our investment offices in Zurich, New York, and Hong Kong provide investors access to unique private markets transactions led by top-tier sponsors globally.
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