Amid a growing appetite for alternative assets in client portfolios, investment executives emphasise manager selection plays a crucial role in achieving optimal returns.
Investing in private assets, such as private equity and private credit, is emerging as a popular choice among advisers to enhance portfolio performance and diversify risk.
Last month, a global survey by Schroders revealed more than half (55 per cent) of financial advisers globally said they are already investing in private assets and a further 19 per cent said they plan to do so in the next one or two years.
A number of funds investing in these assets have been launched in the last year, including managers like Metrics Credit Partners and Hamilton Lane, with others like GQG and Janus Henderson announcing strategic acquisitions to gain a foothold in this space.
However, there are considerable differences between these types of funds and their listed counterparts, which mean advisers need to be careful with their selection.
In August, ASIC flagged Australia’s burgeoning private markets as a new pillar in its expanded strategic priorities, with a dedicated taskforce set up towards this because of the risky nature of the products.
Speaking on an Institute of Managed Account Professionals (IMAP) webinar this week, a panel of investment experts outlined key considerations when evaluating private market managers and how they differ from listed products.
Fred Pollock, chief investment officer at GCM Grosvenor, highlighted the distinct qualities of private equity and private credit managers, describing them as “almost spiritually different animals” in terms of where they sit in capital structure.
“When you find a private equity manager who’s good, what do they really have? They have domain expertise, so they know some area or niche better than others. They know all the management teams in that area, they know all the assets. They have a plan of action to take cash flows from an enterprise and increase those cash flows. It’s not about anything else – that’s how almost all the value is going to be produced,” Pollock observed.
In private equity, this means looking for business people who are able to increase the cash flows and value of a business over time. However, the expectations vary when it comes to private credit, he said.
“When you get to the credit space, it’s completely different. You’re expecting someone who knows the companies, but you’re not expecting them to alter its business profile; they’re not in control of that. But they know everything that can go wrong. They know all the different pieces, they know all the players really well, they know who they’re lending to,” Pollock explained.
In particular, he remarked the standout credit managers “have a focus on the downside”.
“Traditionally, the time period you expect them to be in operation, or their knowledge from their career is longer. The idea of grey hair in the credit space, I think, is even more appreciated than in the private equity space,” he said.
Hagai Netser, head of private markets and opportunistic portfolios at Koda Capital, echoed the sentiment, adding that past failures can actually prove to be a value-add when it comes to manager selection.
“In the private credit space, you want to make sure you’re investing with managers who have been through bad times before. Managers who have never experienced any falls are not necessarily a positive for us,” he said.
“We want investment managers who have successfully gone through challenges, which interestingly we’re not seeing many of recently.”
Meanwhile, in terms of private equity, he highlighted the importance of manager conviction, emphasising the need for managers who are deeply knowledgeable about their investments.
“We’re looking for managers who know their companies inside and out, have very bullish views on them, and they’re good with working with management teams. It’s not just the portfolio or track record that we try to review, it’s that manager’s ability to impact management teams, in both good and challenging times,” he explained.
“Sometimes, it’s about managers understanding the vision and where a company can grow, even if just looking at the balance sheet or income statement doesn’t look very promising at some points of time.”
He flagged diversification as one of Koda Capital’s top five considerations when evaluating a manager’s fund or strategies in private markets.
“It is especially important in private debt because even if you choose the best bonds or underwrite the best loans out there, you don’t expect to make four or six times your money unlike in private equity. I’d say it’s especially important in debt to protect against that downside,” he pointed out.
Choosing the right private market manager remains a hot topic among investors, given the higher risks associated with such investments.
Pitcher Partners previously urged caution and due diligence about the use of private credit funds, given its opaque nature and illiquidity.
“The risks and benefits of private credit funds can be likened to buying a used sports car – it can offer great performance, but fail to do your research and it could deliver a boot-full of headaches,” said Christian Golding, executive director of Pitcher Partners.
