Private asset investment set to rise as market shifts

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MEDIA RELEASE: In an environment where company valuations have become distorted, interest rates remain low and volatility in listed markets is high, private assets will play an increasingly valuable role in helping investors meet their objectives over the longer term, according to Schroders Australia country head, Chris Durack.

“Investors are seeking new opportunities to achieve their objectives and to diversify their portfolios across uncorrelated investments in traditional listed equity and fixed income markets.  In this environment, high quality, sustainable, unlisted assets play a useful role in portfolio construction, allowing investors to access the full breadth of investment opportunities in the market in order to achieve their longer-term objectives,” Mr Durack says.

“Private assets are relatively new to the Australian market for retail investors. But we know from the latest Schroders Global Investor Study that the majority of investors (67 per cent) are willing to hold investments for at least seven years if they can offer a potentially higher return and private assets fit this criteria.

“As an alternative source of return, private assets can help to diversify investment portfolios and can offer a revenue stream or potential capital growth to help meet long-term goals.”

Claire Smith, alternatives director, says company and market dynamics are also shifting which is creating opportunities. 

“The number of public companies listed on Western exchanges continues to decline and investors globally are following suit, increasing their allocations to private markets. As private equity transactions price off fundamentals, and with less capital in the market at present, we’re currently seeing very sensibly priced opportunities. 

“Private equity can deliver higher long-term returns, offer access to companies that are diverse in stage and size, and deliver portfolio diversification due to its unique investment universe, valuation methodologies and low correlation to listed markets.  

“Traditionally, private equity investments were not easily accessible to a broad range of investors due to their large investment minimums, the requirement to meet periodic and irregular calls for capital, longer investment horizons and low liquidity. However, this is changing with new product solutions coming into the market. 

“In the wake of COVID-19, private equity market valuations are currently lower than have been seen in recent years, which makes it potentially an attractive time to invest. 

“The small to medium private equity market offers strong opportunity for growth in the current environment. We particularly like non-cyclical companies, such as healthcare, technology and other essential services which have performed strongly during the pandemic.” 

Additionally, Nicole Kidd, head of private debt, points to the dislocation in the Australian loan market, with the banks – which have traditionally dominated the lending space – reconsidering their risk appetite in certain parts of the market, creating a shift in the supply/demand equation between lenders and borrowers. 

“There is a growing need for institutional capital to fill the void and we are seeing a greater volume of opportunities structured with institutions in mind. Alongside this we have investors who need an income stream and are facing a market where dividends are depressed, and bonds are offering minimal returns. We see our role as bringing both investors and borrowers together, by providing access to well-structured loans, and returns with low or no correlation to listed markets” Ms Kidd says.

“The impetus to consider investing in private debt in 2020 has been driven by a search for higher yield, or duration, or a combination of both, but the market is complex and requires specialist experience.

“It’s an opportunity that has not gone unnoticed, with Schroders’ recent Institutional Investor Study finding that 28 per cent of investors globally plan to increase their allocation to private debt in the next three years. This indicates that investors value structurally defensive debt instruments in a private market setting that also allows for flexibility.

“Currently representing only 1 per cent of global private debt AUM at USD60 billion, the Australasian private debt market offers significant growth potential.

“The Australian private debt market is an important and emerging strategic opportunity for investors,  where credit-focused managers can help further drive the range and depth to capture valuable returns as the market continues to diversify away from the increasingly risk-averse bank sector,” Ms Kidd says. 

“With a long history and deep experience in private assets globally, Schroders is investing in its local capabilities. We are committed to working with Australian investors to leverage private assets to help achieve their objectives,” Mr Durack concludes.