Understanding Private Investments

Does this sound familiar? As you review your investment portfolio and notice a few sharp swings in value, have you ever wondered, “What else is out there? Have we considered all of our options?”

For many families, the answer is “no.” Private investments may be an option for qualified investors1, and although these types of investments can help portfolios navigate challenging markets, this asset class is often overlooked (if investors are even aware of its existence). So, what do you need to know about them? Here are some answers to commonly asked questions about private investments.

What are private investments?

  • Private investments give access to investment opportunities unavailable in public markets.
  • A few examples of private investment strategies include private equity, venture capital, private real estate and private credit.
  • They do not trade daily like traditional public investments in stocks and bonds.
  • Private investments have unique risks, as we discuss in more detail below.

Why have I never heard of private investments?

  • Historically, they were only accessible to larger institutional investors such as college endowments,pension funds and other institutions.
  • They typically have substantial minimum investment sizes, often $10 million or more.
  • More recently, technology platforms (i.e., iCapital, CAIS, Glasfunds) have made private investment strategies more accessible to high-net-worth individuals and families, at significantly lower minimums.

What might private investments offer that public ones may not be able to?

  • Historically, private investments have helped improve overall portfolio outcomes by:
    • Enhancing returns over the long term
    • Generating higher yields
    • Reducing risk
    • Offering potential tax advantages that may not be available in public investments

What are some examples of private investment strategies?

While we’re not in a position to make recommendations in this article, here are a few common strategies used in today’s market environment:

Private equity - Secondaries

  • When companies stay private for longer, it often creates a situation that may:
    • Eliminate the pressure from the public markets to manage quarterly expectations
    • Allows management teams to focus more on long-term growth
    • Provide the opportunity to raise larger sums of money in the private market
  • There are many more private companies than public ones, providing a wider range of choice.
  • Purchasing equity in private companies, especially at a discount, could offer the potential to enhance returns with less relative volatility than publicly traded equities.

Private real estate - Unlisted REITs

  • Real estate can be a hedge against inflation as property values and rents increase.
  • Performance reflects the underlying fundamental value of the real estate, generally without the same degree of influence from investor sentiment that publicly traded REITs experience, given that the latter typically trades daily on a stock exchange.
  • Unlisted REITs can offer potential tax-efficient income generation.

Private credit - Middle market lending

  • Generally tend to offer higher yields than comparable public market investments
  • Aim to provide downside protection from stricter underwriting standards and covenants
  • Rather than the fixed rates of traditional fixed-income investments, middle market loans typically have a floating rate structure where yields increase as interest rates rise.

Aren’t private investments risky?

All investments involve some degree of risk. However, there are unique and sometimes significant risks involved with private fund investments.  Investors would be wise to weigh these risks against their own risk tolerance when considering private investments.  A few examples of these risks include:

  • Liquidity risk—the risk that you may be unable to access your capital when you want it. This is one of the most important tradeoffs to consider before making any private investment.
    • Liquidity is a spectrum. It can range from monthly withdrawal requests to a lock-up periodof more than 10 years.
    • Some investors may opt for a combination of private investments where some of themoffer greater liquidity, in order to help offset the less-liquid investments.
  • Asset class and investment-specific risk
    • Thorough due diligence is essential before investing and should be conducted by experienced investment professionals.
    • Fees are typically higher for private investments than public investments; we believe investments should be underwritten on a net-of-fee basis.
  • Lagged Valuations
    • Private investments are not priced as frequently as public markets, typically monthly or quarterly, which may impact valuation efforts.
    • Lags in reporting are typical with more complex investments, requiring up to 90 days.
    • They can often involve hard to value assets as well, such as privately held companies, where precise valuations may not always be readily available.
    • Strict valuation policies can help to maintain consistent and fair pricing.

Should my entire portfolio be private investments?

Private investments may be an option for certain qualified investors looking for further diversification. It’s a general best practice not to invest solely in private investments. A prudently constructed portfolio is typically well diversified, and for qualified investors, private investments may be another investment option to consider.

  • While many benefits exist with private investments, there are also potential drawbacks, such as illiquidity, that should be considered before investing.
  • Risks will vary by strategy, so it’s often wise to work with a financial professional who understands the private investment landscape, in order to determine which strategies may be suitable based on your specific financial goals, investment time horizon and risk tolerance.

Please contact your Corient Wealth Advisor to find out if private investments are appropriate for you and whether they may help you navigate today’s market environment.

 

1 Private Investments generally require investors to meet certain eligibility criteria such as Accredited Investor or Qualified Purchaser status, as defined by the Federal securities law.


ABOUT THE AUTHOR

Dilan Kluge, CFA

Dilan Kluge, CFA

Director - Alternatives

Dilan is a Director, Alternatives and is based in our New York City office. His primary responsibilities are focused on conducting due diligence and manager selection for the Alternatives platform. Prior to his current role, Dilan was a Director of Investments at legacy firm RegentAtlantic. His responsibilities included conducting quantitative and qualitative research spanning all asset classes and strategies. His focus was primarily on asset allocation and manager selection across both public and private markets. Dilan holds a B.S. in Finance from the University of Delaware. He holds the Chartered Financial Analyst® designation.




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