Private market investments provide exposure to asset classes such as venture capital, infrastructure, government real estate, private debt and private equity. Head of UBP’s Private Markets Group (PMG) Brice Thionnet gives us some more details about the asset class.
Private markets are in increasing demand, aren’t they?
They have demonstrated their ability to offer further diversification in a portfolio by lowering volatility while generating superior returns, and they can provide investors with attractive recurring returns and capital gains. That’s why they’re so much in demand and their capacity for further growth remains unabated in the current economic and financial environment.
What are the main benefits of private market investing?
A range of studies have documented the superiority of private market returns compared with public market returns, the main factors being:
- Managers’ incentives aligned with investors’ interests
- A broader investment universe than public markets
- Acquisition of companies at lower market values
- Illiquidity premiums, i.e. the excess return investors earn for committing capital over the medium-to-long term
- Their long-term strategic orientation
Is this a Europe-centric trend?
No, the development of private market investing has been a global phenomenon. This is particularly true for venture capital, growth capital, private debt and infrastructure. Today, Asia accounts for more than twice as much growth capital as North America, and about the same amount of venture capital. However, there is still the potential for further growth.
How accessible are they?
Even though valuations are getting stretched in some segments, private markets continue to be under-allocated in individual investors’ portfolios relative to those of family offices and institutional investors. This is mainly due to deals only available to institutional investors. At UBP we pride ourselves on providing access with a lower minimum investment.
How do you approach private markets?
The PMG’s approach to private markets is to select niche, under-the-radar strategies with the potential to generate compelling, recurring returns and/or capital gains. Due diligence and understanding of the risks are paramount in the investment process.
Which thematics should be considered?
UBP’s favourite thematics cover infrastructure, government real estate, the financing of affordable housing through private debt, and impact private equity.
How do you build a private market portfolio and analyse deals?
Building and maintaining a well-diversified private market portfolio is a dynamic process that requires specialised technical and investment expertise, as well as strong legal, compliance, structuring and accounting skills.
The PMG’s deals typically have the following characteristics:
- Exclusive access
- Supportive macro trends
- Easy-to-understand business models
- Strong teams and governance
- Steady cash flows
- Positive social/environmental impacts
For example, in March 2019, UBP clients invested in the existing portfolio of Cambridge Innovation Capital (CIC), a holding company set up by the University of Cambridge in 2013 to bring private capital to rapidly growing intellectual-property-rich businesses in Cambridge. The target return is three times the equity invested, and the investment horizon is 5–7 years.
Contrary to a “blind pool” investment, which involves allocating capital to a strategy without knowing exactly how it will be deployed, these companies were identified as being some of the most rapidly growing technology and healthcare businesses emerging from the Cambridge ecosystem.
By June 2021, the portfolio consisted of 25 companies and the share price had increased by 45% since UBP clients invested.