Ultra-High-Net-Worth investors (UHNWIs) are increasing their allocations to private markets, and it’s a sign everyone else should as well.
Some UHNWIs have allocated as much as 31% of their portfolios to investments in private companies (i.e., private equity) – up from 2021 and early 2022.
So why private markets?
Billionaire Ray Dalio gives us a hint into what UHNWs are thinking. Dalio recently gave some investing advice and warned the next two years would be a “very risky time” in a Q&A session in his March newsletter and videos published last month.
As for his thoughts on the economic outlook in the U.S., Dalio had this to say, “While people are now not thinking about the next interest-rate cut and quantitative easing of the Fed, we should because the timing of these is probably less than about a year away and that will have big effects. I think there is a good chance that it will produce a big decline in the value of money. So, it looks likely that the financial/economic picture over the next year or two will be tough.”
As for his investing advice for the next two rocky years? “Please understand that I’m not sure of anything. That’s why I believe that the key to good investing lies in achieving a balance of uncorrelated good return streams so that one’s portfolio has little or no bias to go up and down as conditions get better and worse.”
Therein lies the key to why UHNWIs are allocating to private markets more heavily now and why all investors should do the same.
The private markets, by definition, are uncorrelated to public markets. Assets such as private equity and private real estate are not traded on public markets; therefore, their values are not determined by demand on public exchanges.
As a result, private equity and private real estate can generate positive returns and continue to appreciate even as the broader markets decline because of noncorrelation. These assets offer the opportunity to generate “uncorrelated good return streams,” just as Dalio recommended.
The value of private investments is undisputed.
The SEC acknowledges the value of private investments. It is pushing to make them more available to the average investor because of their ability to provide above-market risk-adjusted returns.
In 2020, SEC Director Dalia Blass indicated, “Private investments have the potential to provide stronger returns and diversification for investors.” Former SEC chair Jay Clayton said, “I continue to worry that retail investors do not have access to as broad a slice of our capital markets as I would like them to have.” This focus on private markets has led regulators across the globe to loosen restrictions on private investments, giving rise to platforms facilitating retail investments in private companies.
In the U.S., loosening investor qualification restrictions and advertising rules has made private markets more accessible than ever. Whereas private market investing historically required high investment minimums and the right connections with the right people to get access, those days are over, as private investment opportunities are now just a click away.
The increased attention on private markets because of the promise of high uncorrelated returns has resulted in an unprecedented amount of investment capital moving into the private markets.
In 2019, in a watershed moment for private markets, money raised from private offerings exceeded capital raised from registered public offerings. Momentum has been building over the past decade as there has been a steady increase in the number of offerings and amounts raised under Regulation D private offerings. In 2019, over $1.5 trillion was reported raised under Regulation D compared to $1.2 trillion through registered offerings.
The value from private investments is undisputed, and it’s not just the above-market risk-adjusted returns that appeal to investors.
They are also drawn to the following benefits:
Large Investable Universe.
Private markets offer investors various investment options to fit their investment objectives, including asset class, investment structure, term, geographic location, and management expertise.
Tax Benefits.
The various tax benefits, including deductions and depreciation, offered to real estate and brick-and-mortar businesses allow investors to keep more of what they make.
Leverage and Scaling.
Commercial real estate and business loans allow investors to leverage their capital to acquire more expensive assets.
Inflation Hedge.
High-demand assets can provide income and growth that can outpace inflation – preserving capital and ensuring income through challenging times.
UHNWIs are going all in on private assets. The benefits are numerous.
Should you follow UHNWIs? The answer is clear. For uncorrelated income streams and growth, private investments are what investors will need to weather the next couple of years that Ray Dalio and other UHNWIs have warned will be risky times to come.