Semi-liquid strategies broaden investor inclusion
In a low-growth low-yield environment, an increasing number of institutional investors wanting to meet their expected returns are actively considering the value of private assets, as part of their portfolio strategies.
alternatives, Asia Pacific
“We are late cycle and without significant global growth the public markets have been highly sensitive to geopolitical news such as the US-China trade tensions and Brexit. After a decade of asset price inflation, fueled by very accommodating monetary policy, we find investors are concerned about future returns and volatility,” says David Seex, Schroders’ head of alternatives, Asia Pacific.
“Just when we thought the easing was about to come to an end, it’s all back on again. We’ve had the Federal Reserve cuts and the European Central Bank cut, and we’re probably going to have a Bank of Japan cut — low yields look like they are here to stay. Today, we see an estimated $15 trillion of global debt with negative yields, including a third of all government bonds. Investors are looking for alternatives to their traditional allocations,” Seex adds.
The changing sentiment to private assets is clearly illustrated in Schroders’ annual Institutional Investor Study. The 2019 survey of 650 global institutional investors, collectively responsible for $25.4 trillion in assets globally, reveals 50% of institutional investors in Asia Pacific are likely to increase their allocations in private assets, over the next three years.
The study also finds that 65% in Asia Pacific expect private assets to deliver higher returns and greater portfolio diversification – a clear indication that investors are struggling to find returns and diversification through conventional asset classes. Asia Pacific investors (39%) are also aiming for a steady income stream from private assets, a demand level much higher than the global average (28%).
Asia Pacific investors’ key reasons for private asset investing
Source: Schroders Institutional Investor Study 2019. To what extent are the following factors reasons for you to invest in private assets?
INSTOS LOOK FOR RETURNS AND AVOID SENTIMENT-INDUCED VOLATILITY
Investors are actively looking at private equity, infrastructure and real estate equity as public equity alternatives and at direct/SME lending, infrastructure debt and real estate debt as credit alternatives.
Amongst Asian investors real estate and private equity have been the most popular equity market alternatives – with the goal of capturing an illiquidity premium with lower volatility. Of those surveyed recently, 92% globally believe real estate equity will deliver a minimum return of 5% in the short term (12 months); whilst 86% see so in private equity.
In the private markets valuations tend to be driven much more by the underlying fundamentals of the asset than the direction of the market. Each asset purchase is usually a bilateral transaction between buyer and seller, after substantial due diligence.
“As a style of investing private equity is highly active with the sponsor either sitting on the company’s board or potentially even in management, and as a result interests are highly aligned with managers compensated according to how well an investment does. At this point in the cycle many find it easier to get comfortable with the prospects and plan of a single business than the direction of the market,” Seex adds.
However private markets have not been immune to the availability of capital. Seex believes investors need to be selective and look for assets in more specialised segments of the private equity markets, where capital does not find its way to opportunity as easily. He says smaller companies present opportunities to buy assets more cheaply, add greater value, and with lower leverage, limit financial risk.
SEMI-LIQUID STRATEGIES BROADEN INVESTOR INCLUSION
Typically, closed-ended funds are popular with endowments, foundations, life insurance, sovereign wealth and pension funds, who tend to be better able to accept illiquidity over the long-term for higher return potential. Yet, 55% of those in Asia Pacific still say they find liquidity a hurdle to private asset investment.
Now, more flexible offerings can provide easier access to investors concerned about private market characteristics like illiquidity, capital call administration and fund minimums.
Schroders for example offers a private equity strategy through a vehicle that provides some degree of liquidity on a quarterly basis. This semi-liquid strategy gives exposure to global private equity that is open-ended, takes subscriptions every month and provides investors with a liquidity window every quarter without compromising the illiquidity premium of the underlying investments.
“In addition to the liquidity structure, our specialist strategy benefits from investing in a diversified portfolio that covers the segments of the market we believe offer the most attractive risk adjusted returns which differentiates it from some other strategies that focus on large buyouts,” Seex adds.
MAY TAKE MULTIPLE PRIVATE ASSET TYPES TO DO THE TRICK
“Increasingly we’re finding institutional investors define their objectives not necessarily in terms of an asset class that they want to be exposed to, but to an outcome they want to achieve. And solving that problem is not necessarily possible with a single private asset type,” says Seex. He says the outcome-oriented approach that Schroders takes has proven to be relevant and successful in helping clients achieve their investment objectives.
For example, Schroders recently worked with an Asian financial institution that expressed its objectives in exactly those terms – they had a return target they wanted, a particular term in mind, and they had interim cash flow goals.
“They could not be satisfied with any one asset type alone, and we answered to the needs by combining a private equity strategy with an infrastructure debt strategy. The infrastructure debt provided the contractual interim liquidity, while the private equity provided the long-term returns, and together they delivered the objectives of the investor,” Seex says.
With over three decades of strong track record in private assets, Schroders focuses on delivering attractive, risk adjusted returns, where active management of the asset creates value; on a platform that runs private equity, infrastructure, real estate, private credit and insurance linked securities.
“We try to deliver intelligent investment solutions – focusing on parts of the market where demand-and-supply is in its sweet spot, and then selecting assets with strong fundamentals to deliver our clients’ goals. With $44 billion managed on our private assets platform, we combine all the best of a substantial institutional platform with nimbleness and flexibility when it comes to investing,” Seex said.
Click here to learn more about how semi-liquid strategies can help you meet investment goals despite growing uncertainties.
IMPORTANT INFORMATION
The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and does not constitute any solicitation and offering of investment products. Investment involves risks.