Private markets are resource intensive and smaller plans must lean on external partners to do some of the heavy lifting.
Asset owners can’t afford to ignore the risks in private equity, including liquidity concerns and increasing regulation.
There is a misconception that ESG implementation is harder in private markets, however private investors can have a positive influence on companies.
Private markets are on the rise in Canadian pension funds. However, for smaller pension plans, private market investments have proven more elusive according to participants in our recent Private Markets Roundtable featuring three members of Invesco’s Investment Solutions team: Kate Browning, Alternatives Investment Specialist; Paisley Nardini, Strategist; and Danielle Singer, Head of North America Client Solutions.
In this segment of the discussion, they talked about the barriers smaller and mid-sized plans face when it comes to private markets and, importantly, how they can be overcome.
Danielle Singer: There is a lack of what we would call “democratization” in private markets beyond very large-sized plans. There’s significant complexity involved because of the many different asset classes, investment options, differences in funds, benefits, etc. That means there will be situations where a plan is too small to achieve the benefits of scale or to access certain managers.
Paisley Nardini: This is a very resource intensive space, even for sophisticated investors. In today’s world, asset owners have the luxury of being able to lean on external partners to do some of that heavy lifting. If plan decision makers pour all their energy and resources into private market sourcing and due diligence, another part of the portfolio is going to be sacrificed as a result.
Kate Browning: Liquidity is always a risk to consider, as well as the complexity and opacity in the market. You need to be confident in valuation at entry, as well as comfortable with the potential exit profile and the time it takes to get there.
Danielle Singer: As the market grows, regulators are now getting much more involved. There is an increasing requirement for transparency and reporting in various aspects of private market investments. Increased regulation could impact some managers, and it’ll be interesting to see the resulting impact on how certain managers invest.
Paisley Nardini: I’d also add that under- diversification is a risk for investors, especially given the potential performance dispersion across managers. Asset owners really need to look underneath the hood to understand how, and if, they are achieving diversified sources of risk.
Danielle Singer: There are also macro risks on the horizon to consider when investing. For example, certain assets and market segments have higher economic sensitivity and more market-based risks, while others may be more insulated from macroeconomic factors. Evolving environmental, social, and governance (ESG) requirements may also introduce more risk into certain assets and market segments. You don’t want to be concentrated in any one sector or asset class.
That said, I think there may be a misconception that ESG implementation is a lot harder in private markets. Certainly it’s different, but all managers can be very transparent and explicit and they should have a robust, formal process around ESG and responsible investing. Depending on strategy and asset class, there may also be unique opportunities for private investors to positively influence their portfolio companies and assets from an ESG perspective.
Capital market disruption changes the opportunity set
Rising rates may have a two-fold impact on real estate debt: better relative value vs. equity investments and opportunities in fundamentally strong sectors.
Real estate: Ideas that CLIC
Longtime real estate investors are well-acquainted with the “Residential, Industrial, Office and Retail” framework that has defined this space for decades. Invesco Real Estate is reimagining this approach — one that we believe better represents the evolving range of opportunities that real estate offers investors of how we Consume, Live, Innovate and Connect.
Opportunities in private credit and direct lending
Scott Baskind, Invesco’s Chief Investment Officer and Head of Private Credit, and Ron Kantowitz, Invesco’s Managing Director and Head of Private Debt, discuss opportunities in private credit and direct lending, as well as the growing role ESG is playing in this space.
NA2163731
Important information
Header image: Duet Postscriptum / Stocksy
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
The opinions referenced above should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
About our capital market assumptions methodology
We employ a fundamentally based “building block” approach to estimating asset class returns. Estimates for income and capital gain components of returns for each asset class are informed by fundamental and historical data. Components are then combined to establish estimated returns. Here we provide a summary of key elements of the methodology used to produce our long-term (10-year) and medium-term (5-year) estimates. Fixed income returns are composed of; the average of the starting (initial) yield and the expected yield for bonds, estimated changes in valuation given changes in the Treasury yield curve, roll return which reflects the impact on the price of bonds that are held over time, and a credit adjustment which estimates the potential impact on returns from credit rating downgrades and defaults. Equity returns are composed of; a dividend yield, calculated using dividend per share divided by price per share, buyback yield, calculated as the percentage change in shares outstanding resulting from companies buying back or issuing shares, valuation change, the expected change in value given the current Price/Earnings (P/E) ratio and the assumption of reversion to the long-term average P/E ratio, and the estimated growth of earnings based on the long-term average real GDP per capita and inflation. Volatility estimates for the different asset classes, we use rolling historical quarterly returns of various market benchmarks. Given that benchmarks have differing histories within and across asset classes, we normalize the volatility estimates of shorter-lived benchmarks to ensure that all series are measured over similar time periods.
Investment Risks
(i) IIS develops CMAs that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on a 10-year investment time horizon, are intended to guide these strategic asset class allocations. For each selected asset class, we develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. For additional details regarding the methodology used to develop these estimates, please see our white paper Capital Market Assumptions: methodology update.
(ii) This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. These asset class assumptions are passive, and do not consider the impact of active management. Given the complex risk-reward trade-offs involved, we encourage you to consider your judgment and quantitative approaches in setting strategic allocations to asset classes and strategies. This material is not intended to provide, and should not be relied on for tax advice.
(iii) References to future returns are not promises or estimates of actual returns a client portfolio may achieve. Assumptions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Estimated returns can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.
(iv) Indices are unmanaged and used for illustrative purposes only. They are not intended to be indicative of the performance of any strategy. It is not possible to invest directly in an index.
(v) The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
This link takes you to a site not affiliated with Invesco. The site is for informational purposes only. Invesco does not guarantee nor take any responsibility for any of the content.