Why do Private Assets matter?

Why do Private Assets matter?

As the financial market continuously evolves, individuals and corporations are making way for "private assets" to strengthen their portfolios due to its advantages of high return potential and low volatility in most cases. This article will give you a deeper understanding of private assets and how they can play a pivotal role in your investment portfolio.

What is a private asset?

Private assets or alternative investments are financial assets held in investments that do not fall within the conventional investment categories or, in simpler terms, assets that are not publicly traded. Some examples of publicly traded assets include stocks, bonds, and cash. The umbrella term "private assets" covers a range of tangible assets like real estate to intangible assets like private equity. Unlike public assets, these investments do not endure the same level of regulatory scrutiny, and information concerning them is not necessarily accessible, making assessing their actual value more challenging.

Types of private assets?

There are several types of private assets, each adopting its unique risk-reward profile and level of liquidity. Here are the four main types of private assets.

1. Private Equity: This involves investing in private equity funds. Private equity funds are pooled investment vehicles that acquire stakes in private companies. When investing in a company, they aim to restructure the corporation using their operation expertise or accelerate growth by providing capital. Investments can also be made via venture capital, in which investors support upcoming companies with high growth potential. Another investment strategy in private equity is buyouts. This involves buying a controlling interest in a company to improve its performance and possibly selling the stake for a profit.

2. Private Real Estate: includes investing in physical properties or real estate mutual funds such as the Private Real Estate Investment Trust (REIT). Physical properties could consist of commercial, residential, or other development projects.

3. Private Infrastructure: This could include tangible assets such as toll roads, power plants, transportation systems, communication networks, and pipelines. Since investments into these assets are not accessible to everyone, individuals would invest in private infrastructure funds instead, which could include one or several types of infrastructure depending on the fund structure created by investment management corporations.

4. Private Credit: This is when investments are made into non-public debt and private lending companies instead of publicly issued bonds.

Why invest in private assets?

Numerous characteristics of private assets indicate that investing in them can yield an abundance of benefits. Here are a few examples.

1. Diversification: Since private assets have little to no correlation with the traditional market, investors could use private assets to diversify their investment portfolio and reduce overall risk by spreading it across different types of investments.

2. Potential for Higher Return: While returns on investments are not guaranteed, private assets have the potential to offer higher returns when compared to traditional markets. This is because private assets are subject to higher levels of risk, and capital is tied down for long periods, which leads to an "illiquidity premium" being demanded.

3. Unique Opportunities: Investing in private assets offers investors access to opportunities not available through traditional investments, including emerging startups, niche industries, and specialized credit.

4. Volatility: Private assets like infrastructure and real estate can be quite stable. Infrastructure investments often involve long-term contracts generating stable cash flows. Similarly, real estate investment can provide steady streams of income through rent. Both qualities lead to a reduction in volatility.

5. Hedge Inflation: Private assets like infrastructure and real estate can serve as a hedge against inflation. Typically, the value of these assets appreciates as prices increase, thereby maintaining their purchasing power.

How can you invest in private assets?

While investing in private assets can be lucrative, it is essential to comprehend the various investment methods.

1. Private Asset Funds: Private asset funds consolidate investments within a particular asset class. These funds, which professional asset managers manage, can provide diversified exposure to private assets.

2. Direct Investments: Investing directly in a private asset, such as purchasing commercial real estate or a private company. This strategy requires substantial expertise and resources.

3. Co-investments: Investors can partner with private asset managers or other investors to engage in a particular opportunity, thereby reducing the required capital and gaining access to otherwise inaccessible investments.

4. Secondary Markets: These are platforms or exchanges where investors can purchase and sell interests in private assets or funds. While providing some level of liquidity, the prices of these markets can be significantly different from the asset's intrinsic value.

Future of private assets

The future of private assets seems promising as the industry has grown in recent years, with assets under management (AUM) at an all-time high and attention from fund managers and investors increasing over time. This leads to the boom of new asset classes with high growth potential. This increases the demand from investors since new forms of private assets are emerging to satisfy each investor's unique investment objective. Private assets are no longer exclusive to institutional investors and family offices but are now accessible to the conventional investor. Like what happened with stock market during the 1900s, history has a tendency to repeat itself. However, this time around, a similar trend is emerging in the private asset market. Much like the increased number of investors who flocked to the stock market back then, we are now witnessing a growing appetite for private asset investments.

Sources:

The Past, Present, and Future of the Alternative Assets Industry | Preqin The Pros and Cons of Alternative Investments (investopedia.com) Are Alternative Investments the Best Inflation Hedge? Here's the Data | The Motley Fool What Are Alternative Investments? Definition and Examples (investopedia.com)

By Thanatorn Phanichewa

Product Strategy and Development XSpring Asset Management Company Limited