Article by: Navin Lala, client director at Old Mutual Alternative Investments
The fundamental needs of investors have always been anchored around maximising returns while managing risk. Market cycles and opportunities may wax and wane due to economic, technological and geopolitical shifts, but the underlying objectives of investors seldom change.
Investors are always in pursuit of finding attractive return opportunities and adapting to new ways of accessing returns in the most efficient manner. In a similar manner in which the inclusion of passive investments has reduced portfolio costs, alternative investments or private markets have many important characteristics that improve portfolio effectiveness from a return and risk perspective.
In private markets we find several important characteristics that improve portfolio efficiency from both a return and risk perspective. From a return perspective private markets provide investors with access to returns from high growth companies and industries that may not be accessible in the traditional listed markets like the Johannesburg Stock Exchange (JSE). Infrastructure is a case in point where opportunities in this secular mega trend reside outside of the domestic listed market.
Similarly, from a risk perspective, private market assets have lower correlations to traditional stocks and bonds, as well as the benefit of valuations being a function of the economic performance of the underlying assets and not subject to the asset price volatility of traditional listed assets where changes in market sentiment can leave listed assets in positions of material over or under valuation that can last for extended periods of time.
Globally investor portfolios have evolved from a traditional 60/40 blend of stocks and bonds to a roughly 40/30/30 blend of stocks, bonds and alternative investments. Investors have experienced the benefits of alternative investments which in part has led to the global alternative investments industry growing from an industry with assets under management of US$4 trillion in 2010 to over US$20 trillion today.
Another key factor driving the growth in private markets is that companies are staying private for longer. Many companies choose to stay private as they believe that it allows them to maintain their pro-growth entrepreneurial mindset, allowing them to be nimble and adaptive to changes while remaining single mindedly focussed on executing the companies long term strategy and objectives. Further being a listed company can be expensive and onerous.
To get a sense of the scale of the opportunities in private markets, the investable private universe is an order of magnitude larger than the listed markets. Globally there are about 10,000 public companies with revenues greater than US$100m, compared to roughly 95,000 private companies that are of similar sizes in revenue. To put this into context, out of the total investable universe (105,000 public and private companies), investing in the listed market only, means that investors would be ignoring more than 90% of their investment opportunity set.
Read the full story https://www.oldmutualalternatives.com/industry-news-and-insights/media-centre/where-south-africas-next-returns-are-being-built/
