Published: Apr 19, 2024
Focus:
Insights
In the UK, the trend among individual investors towards alternative assets and private markets has seen a notable increase, attracted by the potential for higher returns and diversification from the traditional asset classes. The low correlation between private and public markets, can provide a hedge against volatility in the listed markets, with alternatives such as private equity historically outperforming traditional investments like equities.
Research by the Investment Association in 2021 highlighted that 80% of UK wealth managers were directly investing client funds in alternative assets. PwC forecasts that by 2025, £21.1 trillion will be globally invested in alternative asset classes. This shift is accelerated by the advent of innovative investment platforms, which create another route to access these types of investments for experienced, high net worth investors.
Concurrently, the declining number of publicly listed companies is reducing the ability for investors to diversify their portfolios across sectors, regions and sizes. Over the past three years, the UK has experienced a 12.5% reduction in listed companies, with only 23 IPOs on the London Stock Exchange in 2023. Moreover, the volume of buyouts of UK PLCs in 2023 reached its third highest level in a decade, as private equity firms capitalise on more favourable valuations for listed companies.
Why Individual Investors Are Turning to Alternative Assets
Diversification
The primary attraction of alternative assets is their capacity for diversification. These investments inherently diverge from the patterns of traditional listed markets, offering a potential buffer against negative market trends and tapping into opportunities absent in the traditional 60/40 portfolio structure.
Asset allocation is fundamental to crafting a robust and resilient investment portfolio. Traditional investments typically fluctuate in tandem with the financial markets, whereas alternatives exhibit different behaviours under various economic and market conditions. By incorporating assets such as private equity and real estate, investors can reduce volatility and enhance risk-adjusted returns over time.
Macro-economic Uncertainty and Market Volatility
The past few years have seen significant macroeconomic uncertainties, including increasing geopolitical tensions, the pandemic, and Brexit. These conditions have steered some investors towards alternative assets, which are generally perceived to be less susceptible to stock market fluctuations or the broader global economy's whims. Private equity, for instance, is not directly linked to public market performance, and therefore has the potential to offer less volatile returns even in turbulent times. Private equity backed companies benefit from patient capital and can focus on long-term strategies without the pressure of short-term market expectations.
Enhancing Returns
The potential for higher returns is another compelling attribute of alternative assets. The BVCA's 2022 research indicated that private equity funds managed by its members achieved a 17% annual return over a decade, significantly outpacing the 6.5% yield of the FTSE All Share Index.
Blackrock also posits that private markets are ‘uniquely positioned’ to capitalise on significant market trends and structural shifts, such as AI and the low-carbon transition. Private Equity’s focus on longer-term investment horizons aligns well with the development cycles of AI and sustainability projects, which often require time to mature and achieve their transformative potential. It can accelerate innovation, support the commercialisation of new technologies, and facilitate the scaling of businesses that are critical to advancing these fields.
Investing directly in these emerging companies through co-investment offers a way to tap into the expected growth of these so called ‘mega forces’ that may not be available in public markets. Analysis from JP Morgan reaffirms this position where it believes the majority of fast-growing disruptors driving innovation across areas of technology such as AI, automation and robotics, cybersecurity, ecommerce and cloud software will be early-stage private companies.
Greater access for private investors
Historically the domain of large, institutional investors, the past decade has seen a notable shift, with experienced high net worth investors and family offices becoming increasingly aware of the unique risk and reward characteristics of non-traditional assets like hedge funds, private equity, real estate, and private debt.
Technological advancements and increased transparency, along with new entrants, are democratising access. Today, alternative funds and direct investment opportunities are more accessible to experienced investors and family offices, prompting significant capital inflows and fuelling growth in the alternatives sector. Maven Investor Partners is an example of such a structure which enables Professional Clients, such as family offices and experienced, high net worth individuals to co-invest in private equity and property opportunities on a deal-by-deal basis.
That said, access is not universal. Despite a growth in investor interest from retail clients according to Preqin, a ‘lack of products’ and the ‘regulatory environment’ is still restricting their participation which is understandable given the risk profile of such investments.
New approaches to Private Equity investment
Traditionally, private equity investments have been accessed through funds requiring investors to commit capital to a pre-defined strategy. However, the trend towards co-investment on a deal-by-deal basis is gaining traction, offering a more transparent and controlled way for investors to steer their investment choices, aligning more closely with their risk tolerance and investment objectives. A study by Goldman Sachs last year revealed that 59% of LPs (Limited Partners) intend to increase their allocations to PE co-investments in the next 2-3 years.
This strategy facilitates direct exposure to high-quality investments, often alongside seasoned private equity firms. Investors can decide on their level of participation based on the specifics of each deal and their current investment strategy or liquidity situation.
For many investors the greater selectivity and control is the appeal, allowing them to search out the most robust businesses at the right valuations. It also enables them to diversify their portfolios across sectors, geographies, and development stages to help mitigate the impact of industry specific shocks and macroeconomic variances. Not to forget the higher return potential. Unlike fund investing where the manager is paid a performance fee on the overall total return of the fund, a performance fee is only earned by the manager on the positive performance of the specific stand alone investment for a deal by deal investment.
Embracing Alternative Investments
While recent economic volatility has undoubtedly prompted a broader exploration beyond traditional investments, the shift towards private markets reflects a deeper strategic evolution in investment behaviour. Individual investors are increasingly diversifying into alternative assets to boost returns and mitigate risks. This broader adoption of sophisticated strategies, including private equity and real estate, marks a departure from the traditional reliance on equities and bonds, embodying the democratisation of investment and the growing empowerment of individual investors.
Although alternative assets are generally illiquid and carry higher risks, their inclusion as a component of a diversified portfolio is widely advocated by wealth managers. They offer experienced investors with an appetite and capacity for risk, a less correlated investment option to publicly listed assets and the potential for long-term growth, which will be of particular importance during periods of volatility and lower capital market expectations in the listed markets.
