Overview
Recent surveys project assets under management in private markets to almost double by 2025, from $7 trillion today. Institutional investors are being drawn to the asset class by a familiar range of factors: the search for yield and a need for assets that offer different risk and return profiles to stock and bond markets. For investors that are tied to public securities there are a number of ways to gain exposure.
Listed alternative investment managers offer access, but their shares can be volatile
One option is to buy into publicly listed managers of alternative assets, who make money from a mix of stable management fees and variable rewards based on how well the assets perform. Stock market-listed shares in these managers, however, can be volatile, and their performance can suffer from swings in sentiment even as their assets under management continue to grow organically. The stronger franchises should continue to attract assets as capital continues to flow towards private markets, but their shares may be vulnerable to periods of retrenchment if fundraising fails to deliver.
Heavily discounted sectors may attract private buyers
A second way to make use of the trend is to take advantage of the volatility of public markets to buy assets at discounted valuations that typically attract private buyers. Student accommodation in the UK, for example, took a hammering from markets in the initial phase of the Covid-19 pandemic due to fears about future occupancy. But the long-term fundamentals of the assets were still sound, and some providers’ liquidity positions proved strong enough to weather the storm. When they began to recover, one provider in which Fidelity had earlier invested was then subject to a takeover bid at a healthy premium to its share price.
Early movers in emerging sectors can benefit from increased interest
Public markets investors can also benefit from private asset flows by being an early mover into emerging asset classes. Publicly traded alternative investment companies provide exposure to a variety of sectors including transport infrastructure, undersea cabling, renewable energy, and shipping. Many initial public offerings (IPOs) in this area have been in what were comparatively esoteric sectors that have since seen a rush of interest and come to be regarded as asset classes in their own right.
The sheer weight of money in private capital has driven gains in such assets, given the limited supply of high-quality targets compared to huge demand. Big box logistics warehouses, for example, were considered a specialist asset when we first entered the space through a real estate trust investment in 2013. Now logistics assets are considered alongside mainstream property segments such as retail and offices, and our investments benefited from the change in interest over time.
Another evolving area is music royalties, or payments generated when music is purchased or used. Typically royalty holders are artists, writers, publishers and record labels. However, rights can be sold on, and the area has seen a rush of interest in recent years, including the IPOs of two funds that own the rights to songs by artists like James Brown, Blondie and Louis Armstrong. The rise of streaming brings the potential for growth, and the space has since attracted the interest and capital of large, household-name private asset managers, in turn raising values across the sector.
While there is no guarantee that private assets will continue to grow, these examples point to a range of options for public markets investors. The relationship is often thought of as a one-way street in which private companies are made available to hungry public investors via much anticipated IPOs. But the reality is now also one of private investors fighting for the right public assets. In-depth research that looks for high-quality and undervalued assets is as necessary as ever, but public investors can now take advantage of the surge of funding on the other side of the divide.
