New financial technology platforms are making it possible for high-net-worth investors to access private market investments that have previously only been available to institutional investors like pension funds, university endowments, and insurance companies.
Private markets have historically outperformed public markets in almost all major asset classes over the 10-, 15- and 20-year periods, as illustrated in Exhibit 1. At the same time, private market investments have distinct risks and characteristics that make them significantly different from traditional investments, like stocks, bonds, and mutual funds. This asset class is not appropriate for all investors, but in certain cases, it can be a valuable addition to a well-diversified portfolio.
Before making a private market investment, investors and their advisors should consider five key questions:
1. WHAT’S YOUR TIME HORIZON?
Private market investments take years to mature. It takes time to identify and source the right deals, time to improve the underlying investment, and time to successfully exit the investment. Investors looking to fund obligations years down the road (e.g., retirement, charitable giving, or passing wealth on to younger generations) may find private market opportunities attractive. However, those looking for short-term, tactical allocations may find that other investments are better suited to their purposes.
2. CAN YOU AFFORD ILLIQUIDITY?
By their nature, private market investments are illiquid – they are difficult to buy and sell. The long-time horizon previously discussed may enhance the potential for return, but it is also a key consideration for investors with liquidity needs. While registered funds may offer enhanced liquidity compared to traditional private market structures, most private market funds have 10-year terms and a classic J-curve profile, and may not suit the needs of investors requiring liquidity.
3. WHERE DOES AN INVESTMENT FIT IN YOUR OVERALL PORTFOLIO?
An allocation to private markets may provide a variety of benefits to a portfolio: higher return potential, lower correlation to the public markets, and diversification. Some investors may add a private market investment as part of their overall equity strategy for its potential to deliver outsized returns. Others may find it an attractive counterbalance to publicly traded investments or highly correlated assets in their portfolio. Regardless of the size of the allocation or its role in the portfolio, investors should ask themselves what they are looking to achieve with a private markets allocation, and work with a financial professional to monitor if the position is performing as anticipated.
4. ARE YOU COMFORTABLE WITH LESS TRANSPARENCY INTO PERFORMANCE?
Consistent reassurance about performance via daily price quotes or frequent reporting, as is the custom in the public markets, is not made available for private market investments. While private market fund managers report returns and significant portfolio developments to their investors on a quarterly basis, private market investment holdings are inherently difficult to value, and it can be hard to quantify the impact a manager has had on underlying investments until those investments are sold. It is worth noting, however, that the visibility into public market movements daily can cause investors to buy or sell based on fear or other momentum-related sentiment, which is generally not the ideal approach. Conversely, with a private market investment, investors are placing their faith in the manager to create value over a long period of time, with results that are difficult to appraise until the latter half of the fund’s life. This is an important reason why thorough due diligence is key prior to investing.
5. ARE YOU COMFORTABLE WITH THE PRIVATE MARKET FUND AND PRICING STRUCTURES?
The concepts of performance fee, capital commitment, draw down, and distribution structure of private market funds may be unfamiliar for some and difficult to prepare for. Investors considering private market investments should make sure they understand their responsibilities as a limited partner, as well as all fees and expenses before investing.
Determining whether a private market fund is an appropriate investment requires an in-depth evaluation of an individual’s financial situation and portfolio objectives. Prospective investors should discuss their goals and potential risks with a financial professional before investing.
IMPORTANT INFORMATION / DISCLAIMER
The material herein has been provided to you for informational purposes only by Institutional Capital Network, Inc. (“iCapital”). This material is the property of iCapital and may not be shared without the written permission of iCapital. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital.
This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by iCapital. You should consult your personal accounting, tax and legal advisors to understand the implications of any investment specific to your personal financial situation. This material does not intend to address the financial objectives, situation or specific needs of any individual investor. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors.
This material may contain forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. Forward looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Due to various risks and uncertainties, actual results may vary materially from the results contained herein. The information contained herein is an opinion only, as of the date indicated, and should not be relied upon as the only important information available. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. The information contained herein is subject to change, incomplete, and may include information and/or data obtained from third party sources that iCapital believes, but does not guarantee, to be accurate. iCapital considers this third-party data reliable, but does not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. iCapital makes no representation as to the accuracy or completeness of this material and accepts no liability for losses arising from the use of the material presented. No representation or warranty is made by iCapital as to the reasonableness or completeness of such forward looking statements or to any other financial information contained herein.
The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the U.S. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the U.S., where such distribution, publication, availability or use would be contrary to law or regulation or which would subject iCapital to any registration or licensing requirement within such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. It is the responsibility of the recipient of this document to comply with all relevant laws and regulations.
Alternative investment products and services may be offered through iCapital Securities, LLC. Structured investment products and services may be offered through Axio Financial LLC and/or SIMON Markets LLC. iCapital Securities LLC, Axio Financial LLC, and SIMON Markets LLC are each a registered broker/dealer, member FINRA and SIPC, and an affiliate of Institutional Capital Network, Inc. (“iCapital”). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.
© 2023 Institutional Capital Network, Inc. All Rights Reserved.
