Practical considerations
Increased interest in private assets has led to large amounts of capital being raised in the past decade. “Dry powder”, money raised but not yet invested, has hit record highs. High fundraising runs the risk of too much money chasing the same deals, higher prices being paid, and lower future returns. Large buyouts and direct lending are two of the hottest spots on this front.
Better opportunities can be found by seeking out less crowded markets and by using the credibility and reputation of an investment manager to gain access to deals that others would not see. Deal access has become one of the most important edges that a successful investor can lay claim to.
In addition, bigger transactions tend to be highly competitive, whereas smaller or more complex deals tend to be less so. An obvious example is a comparison between a private equity fund taking a public company private (by paying a premium to its public value) and a buyout of a family-run business with no other suitors.
In private debt, structuring is an essential skill, which presents a barrier to entry. This is especially true when dealing in less crowded areas where structure means more than just covenants.
One consequence of the greater scope for private asset managers to steer their investments is a wider dispersion of returns than is typical in public markets. The difference in return between top and bottom quartile buyout funds globally has been around 15%, on average. Manager selection is more important when investing in private assets.
Figure 5: The importance of fund selection in private assets
Private markets offer a rich variety of investment options which can diversify and enhance risk and return for investors. With their growing clout, more and more financing is taking place privately. Investors focussed solely on public markets risk missing out. There is no shortage of attractive opportunities but, with increased interest has come increased competition. Investors should seek out less crowded markets to benefit from the return and risk enhancement that private assets can offer.
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