The ‘4 Ps’ of private market investment selection
Franklin Templeton has shared four rules for financial advisers when it comes to including alternative investments in client portfolios.
The fund manager has shared that advisers need to understand the complexities and nuances of investing in these types of funds which are gaining interest due to their diversification, low correlation with public markets, and higher return potential.
In a report Building better portfolios with private markets: A goals-based framework, Tony Davidow, senior alternative investment strategist, discussed the requirements of due diligence for these assets.
While they are known for being illiquid, the firm recommended the use of an “illiquidity bucket” of around 10–20 per cent of assets that investors are happy and able to invest in illiquid assets for an extended period of time.
“Many investors believe that they should be 100 per cent liquid, but there is an opportunity cost, especially in today’s market environment.
“For many high-net-worth investors, a 10–20 per cent illiquidity bucket may be appropriate given their wealth, income and cash flow needs. Once the adviser has determined the illiquidity bucket, they can then define which asset classes and funds are appropriate to achieve their goals.”
Davidow also listed the four Ps of due diligence when it comes to fund selection.
Several research houses have already described how difficult it can be to assess a private markets fund due to the lower transparency and difficulties in comparing them with equivalent public funds. Structural issues related to these types of funds include its liquidity, leverage, lack of transparency, concentration, and complex strategies.
Davidow urged advisers to consider:
Performance
Has the fund manager generated attractive returns across different economic cycles? Do they have experience managing alternative funds? What are the comparable absolute and relative returns? How much risk have they taken to generate their results?
Philosophy
Does the fund manager have a specific philosophy that they have used over time? Does it make economic sense given the current market environment? Or known future?
Process
How are investment ideas generated, vetted and executed? Who makes the decision? What resources are devoted to research and are they sufficient? Is the process consistently applied? What is the compensation philosophy?
People
Does the fund have a dedicated and experienced team of professionals? What are their professional qualifications? Have they worked together in managing comparable funds? Has there been senior management turnover? What’s the depth and consistency of the investment team?
In May, Franklin Templeton launched its second alternatives fund for Australian wealth clients, focusing on private equity investment. Teaming up with secondary and co-investment fund provider Lexington Partners, it launched the Franklin Lexington Private Equity Secondaries Fund.
This enables Australian clients to invest in a diversified portfolio of private equity investments acquired through secondary transactions and co-investments within a semiliquid accessible structure. Co-managed by both firms, the new fund represents Lexington Partners’ first evergreen fund for the wealth channel internationally.
AUTHOR
Laura Dew
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