Portfolios that invest in private markets as well as equities and bonds can achieve better returns for less risk, although the complexity of these investments has put off many institutional investors, says consultancy Towers Watson.
Investments in private equity, distressed debt, real estate and other private markets are characterised by long lock-up periods that mean the investments cannot be traded at short notice. Because these assets are illiquid, they generally pay a premium to investors who can afford to hold them for a long period of time.
Private markets also offer an opportunity to access unique market segments that cannot be accessed through listed vehicles. Many of these segments exhibit a low correlation with stocks and bonds, meaning they are useful for diversification.
But many investors have been discouraged by investing the private markets by the perception these segments are more complicated. Towers Watson noted that it is a “notoriously challenging process” to find an appropriate benchmark for private market investments.
The consultancy is promoting an approach called “adaptive portfolio management”, which aims to identify alpha returns offered by a private market investment by separating total returns from the effects of leverage, management fees and beta.
©2012 funds europe
