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Key Summary:
- Most of our investment dollars are invested in the casino called public markets.
- Roughly 90% of companies are private; investors are missing a large market opportunity.
- The average investor has very little or no private market exposure. This is changing.
Investors Have Virtually No Exposure to the Largest Market in the World: Privates.
As a consumption-based investor, there are several powerful mega-trends happening around the world. One of these trends is happening in the financial services industry and is still a game in the early innings.
Assets are migrating on the margin away from public equities and fixed income and into private market strategies. Institutions have been heavily invested in privates for decades. Its individual investors turn to benefit.
The investment opportunity: Invest in private market funds or invest in the brands gathering the lion’s share of the assets in the wealth management channels: Blackstone, KKR, and Apollo Global. The brands portfolio has chunky allocations to these wonderful brands and the opportunities for growth in assets and fee revenue remains robust.
Why Consider Private Market Exposure?
The stock market has roughly 4600 listed companies with trailing twelve-month total revenues of roughly $23 trillion. That’s a pretty big market. Blackstone recently stated that about 90% of companies with >$250 million in annual revenue are PRIVATE, not public. There’s an estimated 22 million private companies across small, medium, and large sized companies just in the U.S. The estimated annual revenue is roughly the same as public markets, so most investors are missing half the total opportunity-set by staying “public-only.” (Advisorpedia). For many years, investing in private companies was quite difficult, but that’s changed dramatically over the last 10 years. Private market access has become easier and often doesn’t require locking up our capital like it used to. New innovations in semi-liquid strategies seem to be introduced every day and are being consumed at a rapid rate but it’s still inning 1-2 given the estimated $80 trillion size of the wealth management channel. There’s a significant amount of fee-revenue and asset growth to come.
Blackrock, an asset manager with >$11 trillion in assets has recently made several large acquisitions of private market asset managers clearly see’s what we see. Goldman Sachs, in this week’s earnings call also stated a major initiative to grow their alternative asset management capabilities. Everyone sees the flows and they have done the same math.
Why Are HNW Investors Allocating to Privates?
In one word: diversification. But there’s more to the story. The bulk of the wealth in the U.S. and around the globe is with older consumers. They have been working, saving, and collecting assets for many decades. As we get older, our appetite for risk and volatility tends to fall. Because of algorithms, a wild index options market, and the voracious appetite for short-term trading, the public markets have become much more casino-oriented and volatile than at any time in my 30-year career. Wild volatility wears most investors out. People get emotional and emotions often drive poor decision making which ultimately hurts their ability to generate attractive returns. For a variety of reasons, even the public bond market feels more and more like a casino. And returns have been sub-par across most of the bond complex.
So, all or most of the largest pool of assets ever collected is invested in assets that are more volatile than ever and at a time when the owner of these assets wants a less volatile experience with lower risk of losses. That profile does not seem to jive with today’s public markets. Enter private markets. Here’s a few key reasons Advisors are allocating more and more to private markets. And I do not see this stopping, the problem is acute and the desire for other options is extreme:
- Lower daily volatility – because these do not have to mark to market daily, the volatility is significantly muted. That helps reduce total portfolio volatility meaningfully which keeps investors engaged and sleeping well even during volatile periods. This keeps them on-track for goal achievement. In my opinion, this is the most important reason major asset flows are moving to private assets. Advisors & investors really like this feature.
- Potentially better returns – if investors are going to give up some daily liquidity, they should demand better returns. That’s exactly what has been delivered by the best private market asset managers over many decades. Which firm and funds one chooses, is important. The best of the best has generally delivered solid returns per unit of risk.
- Diversification across thematics – Public market portfolios are very similar and crowded in a handful of companies. We think we have a diversified portfolio, but we just have “beta & size exposure.” Generally, people do not have much exposure to things like inflation-oriented assets, differentiated real estate, private credit, infrastructure, private equity, next-gen energy innovation, etc. Adding exposure to many of these assets offers solid diversification from the crowded public markets.
Bottom Line:
Most individual investors are missing a major opportunity for attractive total returns that are delivered via a much smoother journey. With new and ongoing innovation, more migration of assets away from the public market casino and into private market strategies is sure to happen. This is a mega trend early in its lifespan. Investing in the leading brands gathering the most amount of assets while delivering for clients seems to be a logical decision.
What’s most unbelievable: the stocks of the most relevant alternative asset managers are still incredibly under-owned at the index-level and generally in portfolios. Investing in the leading private managers is not a crowded trade. We expect many more to invest in these stocks as the benefits become more obvious. Today’s “private equity” asset managers are not the same businesses they were in the wild 1980’s.
Disclosure: The above data is for illustrative purposes only. This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.
