The adviser journey of ‘scepticism and enthusiasm’ in private markets
Financial advisers should approach private markets with a mix of “scepticism and education” to ensure they are investing in an asset suitable for their clients’ needs.
Speaking to Money Management, Australian Ethical’s head of multi-asset John Woods discussed how the firm was offering private markets to its investors in various forms. This included as part of a multi-asset fund or a direct exposure in a managed fund via its Infrastructure Debt Fund, which was launched in February 2024.
While the asset class has been gaining attention for its high return potential, Woods noted advisers should approach it with caution.
“Caution is warranted. It is an exciting area that is growing rapidly that can generate good returns, but it is a complex area. If you don’t fully understand your risk appetite or fully complete your due diligence, then you can’t change your mind.”
When dealing with financial advisers, he said the firm is often asked what role private credit should play in a portfolio and how it should fit within their asset allocation. Given the wide breadth of product types available in the market, this question can have multiple answers depending on what a client is seeking. With that in mind, Australian Ethical helps advisers by understanding what they need and deploying resources to help their understanding.
“People want to have a deeper understanding of them because it varies on a fund-by-fund basis; there’s such a wide spectrum of opportunities to sift through.
“Advisers are seeking to educate themselves, which is a good sign they are looking into these questions. It’s big, it’s exciting, and there’s great headline returns, but because it’s private you don’t see all the bad returns. I commend advisers on their journey of scepticism and education as they enter into this asset class.”
He added the boom in recent launches meant some funds are only offering a short track record which can cast doubt on their performance and means advisers need to be extra vigilant in their due diligence.
“You also have to trust they aren’t belittling the risk levels. I had someone come to me who said the risk of default is 1 in 10,000 years, and that’s clearly not the case. In recent history, that fund had had such stable returns that that’s what the numbers say, but that’s not the reality of the underlying investments.
“You have to look beyond the numbers and understand the businesses you are financing, and how they are impacted by the economy, rather than relying on the summary statistics.”
Australian Ethical has been investing in private markets for a number of years and has “accelerated” this more recently with the appointment of Adam Roberts as head of private markets.
Woods said its usage allows the fund manager to reach unlisted areas of the market that are providing more impact.
“There are opportunities in private markets to access investments that let us have more impact, providing capital into the not-for-profit space, which just aren’t available in the public space, and advisers have been asking for that – how we can demonstrate through our investments that we are having a positive influence, and private markets have been some of the best ways for us to do that.
“It’s hard to find a listed company that offers core renewable exposure, for example, but we can find that in private markets and put that capital to work.”
AUTHOR
Laura Dew
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