Global markets have had a volatile start to 2022 amid concerns about Fed tightening and, more recently, the situation in Ukraine. The conditions are less than ideal and difficult for investors, even seasoned ones, to generate income. Falling bond yields make it challenging to diversify portfolios; and fears around inflation tend to increase the correlation between stocks and bonds, meaning there is no hedging effect between the two traditional asset classes.  

We believe a good avenue to diversify and mitigate risks is private markets. Alternatives such as private credit and private REITs provide consistent return and low drawdown risk and should serve as a good source of income for investors. Private equity, particular funds managed by global managers with a strong track record of return, can provide growth opportunities for investors on a medium to long term horizon. Selected private equity names (high growth pre-IPO companies) can provide significant upside and alpha. We suggest investors consider allocating 30 to 40% of their portfolio to alternatives for downside protection and improve your return.

Private Markets as an asset class

The Solactive Private Equity Select Index, the index that indicates the performance of private equity, rose 35.6% during 2021 versus 17.04% for the MSCI World.

Overall, we continue to see private markets as attractive, offering an alternative source of income, growth and alpha potential:

Income - In exchange for less liquidity, direct lending and core real asset strategies can provide enhanced income opportunities more than public market returns, with a typical yield of 400–600bps above LIBOR for first lien loans to middle market companies. We also view real asset strategies such as core real estate or infrastructure as an attractive way to improve diversification and hedge against longer-term inflation.

Growth - Private equity affords exposure to earlier-stage growth companies than generally available in public markets. For example, 497,000 tech companies globally are privately held, compared with just 8,100 that are listed on public exchanges.  From a thematic perspective we continue to focus on artificial intelligence, blockchain, and consumer - the ABC’s of technology.

Alpha - The selloff of tech companies, particularly in Chinese and Southeast Asian names, is creating a window of opportunity for private equity investors to acquire high growth pre-IPO unicorns at a significant discount. Despite certain macro risks such as the pandemic dragging the real economy and regulatory uncertainty, these unicorns continue to have strong fundamentals and revenue growth, and we believe savvy investors should leverage this window to create value and generate returns. 

Overall, private markets can offer a way of enhancing portfolio returns and increasing diversification. While requiring commitments over a longer timeframe, private markets have historically generated higher returns than listed markets, while providing a safe harbour for investors to weather the storm.