Financial markets have evolved over the past decade, bringing innovative investment opportunities. Private market investments, such as private equity, private credit and real assets, have the potential to provide higher returns and diversified risk alongside traditional public market investments like equities. Innovative fund structures are bringing these investments to a new segment of investors.
Why invest in private markets?
For years, sophisticated investors, including foundations, sovereign wealth funds and high net worth individuals, have invested in private assets for potentially higher returns and diversification alongside traditional public markets.
Previously, these investments were less suitable for retail investors because of high investment minimums, strict eligibility requirements and long capital lockup periods. Today, innovative investment managers are addressing these challenges and bringing private marke opportunities to a broader range of investors.
Private investment opportunities have grown from approximately $2 trillion to more than $14 trillion between 2006 and 2023. A mix of regulatory changes, availability of private investment options and company preferences are driving more companies to stay private longer. Companies are increasingly preferring the flexibility and efficiency offered by private investors as a welcome alternative to financing growth through initial public offerings.
Private market basics
Private investments cover a wide range of assets with distinctive characteristics, grouped into three broad categories:
◆Private credit: Private loans not publicly traded, originated by investors and negotiated directly with borrowers. Examples include secured direct lending, asset-based finance and mezzanine debt.
◆Private equity: Equity investments made in private, non-listed companies. Examples include venture capital, growth equity and buyouts.
◆Real assets: Investments involving direct or indirect ownership of tangible, non-financial assets. Examples include real estate, infrastructure, farmland, timberland and commodities.
Innovation brings in new investors
New fund structures and innovation among asset managers are bringing private investments to a wider range of investors, as innovation has helped reduce some barriers to adoption, like mitigating some measure of private investment's liquidity risk through pooled investment vehicles.
Interval funds are one example of this new structure. They are a type of closed-end fund that does not trade on an exchange but is continuously offered, similar to a mutual fund. Unlike a mutual fund, interval funds only allow repurchase offers at regular intervals, up to a certain amount. To the extent more outstanding shares are tendered for repurchase than the amount outlined in the repurchase offer, the redemption proceeds are generally distributed proportionately to redeeming investors (“proration”). Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window. In addition, anticipating proration, some shareholders may request more shares to be repurchased than they actually wish, increasing the likelihood of proration.
Some of the newest interval funds are available for fixed income investors seeking more from core plus or a multi-sector income allocation: Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+. These funds include a mix of public fixed income and private credit, allowing managers the flexibility to pursue higher income by including assets with higher yields brought by the limited liquidity of the private investments in the portfolio. These may be more suitable for investors with long-term horizons or have a portion of their portfolio with limited liquidity needs.
Looking ahead
The potential of private market investments and what they may help provide investors as they pursue their goals explain why this financial market segment is growing. As investment managers continue to innovate, with some using interval funds as a way to offer alternative investments to more investors, the long-standing barriers to broader alternative investment adoption in the everyday investors’ portfolios may finally come down.
To learn more about how private market investments are offering more opportunities for financial professionals and investors and other important information, visit Capital Group’s Public-Private+ Solutions website: capitalgroup.com/plus
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.