There is a global push for retail investors to be able to put their money into private assets, which cover investing in or lending money to (funds of) private companies or big infrastructure projects.
The lure is, of course, the potential for higher and smoother returns than if you placed your savings in the traditional 60/40 split between stocks and bonds. This attraction has only grown with the recent rapid rollercoaster rides—say that three times in a row—in indexes and interest rates.
What can drown in the hype is that private assets carry higher risk than public ones, both in terms of illiquidity and value.
A big concern is that the inherent illiquidity of private assets can make it difficult for investors to cash in on the investment when they need to.
An even bigger concern is that without a common marketplace to provide a fair price for these assets, there is less consensus on how to value them. What might look like a unicorn at the time of investment might turn out to be a toothless mule with an empty TP roll glitter-glued to its forehead at the point of redemption.
And to add cost to risk, the fees to get into private assets can be up to three times higher than their publicly-traded counterparts (source: Morningstar).
To alleviate these concerns, both regulators and asset managers are taking steps to make private assets more accessible.
The UK has recently refined the rules for long-term asset funds (LTAFs), which are semi-liquid funds with a blend of liquid and illiquid (private) long-term assets that can be offered to both institutional and retail investors. The rules now ensure that only certified asset managers can offer LTAFs, that their structure is standardized, and that retail investors get thorough information on the risk and illiquidity of the funds.
Still, the LTAFs have been slow to catch on. Only 23 have been approved in the UK so far, according to The Financial Conduct Authority. Investors in the EU are more familiar with the structure, with around 150 LTAFs currently in existence (source: Morningstar Direct).
In the US, private assets are mostly available to those endowed with a brokerage or wealth account, and according to Morningstar, the market for semi-liquid funds has grown to a whopping 60% since the end of 2022.
Asset managers are working hard and fast to be the first to also offer private assets to those with a regular retirement account. Empower, a giant 401(k) manager, announced its first semi-liquid fund in May, and this week BlackRock also joined the front. The US market for defined retirement contributions is currently worth $12 trillion (source: Bloomberg).
But while asset managers are licking their lips with the prospect of serving many more of us, the current private asset investors have less of a Pavlovian response.
FT recently reported that due to the slump in private equity, Canada’s biggest pension funds underperformed in 2024. The higher interest rates, and thus borrowing costs, in 2022 and 2023 have made it difficult for private equity to raise funds and way less attractive to exit investments, and therefore it is all a bit dull. At the same time, the publicly-traded stock indices, against which private equity is benchmarked, have had a party with both confetti and balloons, and that doesn’t reflect well on the private equity portfolios.
However, it does underline that private assets shine brighter when you have the patience to look at them through long-term return-tinted glasses.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.