Wealth Strategies

Private Markets Are "Where the Momentum Is": Morningstar Investment Conference

Charles Paikert US Correspondent Chicago July 2, 2024

Private Markets Are

As readers know, private market investing is all the rage – to the point where some organizations have raised a few red flags. The private market story was front and center in the Morningstar conference attended by our US correspondent in Chicago recently.

Private market investments took a star turn at the Morningstar Investment Conference in Chicago last week. Caveats abounded, to be sure, but there was no doubt that private credit and equity markets are top of mind right now for advisors and fund managers. 

Despite noting that alternative assets have disappointingly “over promised and under delivered,” Morningstar CEO Kunal Kapoor acknowledged that private markets are “where the momentum is,” pushing the research firm to increase its coverage of the asset class.

Financial advisory firms have developed a “big appetite” for private market products, with many realizing that developing an expertise in the asset class “can really create differentiation,” said Hightower Advisors CEO Bob Oros.

Multi-family offices are also paying attention. A recent UBS survey of MFOs found that nearly one-third of respondents planned to increase their exposure to private debt. 

Wealth managers shouldn’t ignore private equity either, according to a new UBS report. “This is a good time to allocate to the asset class” the report stated. “Entry valuations for new portfolio companies are back to pre-Covid averages (unlike public equities), offering an opportunity to acquire assets at a reasonable price.”

Major marketing opportunity
For investors who can tolerate the risk that comes with a very opaque and unfamiliar market, meet high minimums and are willing to forsake liquidity, private markets can provide uncorrelated portfolio diversification and potentially higher returns.

Clearly, Wall Street sees private markets as an enormous marketing opportunity, noting that less than 5 per cent of individual portfolios have private market asset allocations.

Despite attracting billions of dollars as banks have withdrawn from parts of the credit market, private direct lending remains an “untapped” investing opportunity where “inefficiencies can be exploited,” Blackstone managing director Fran Golden told a packed audience of advisors and wealth managers at the conference’s breakout session on “the meteoric rise” of private markets.

Leveraged loans from private debt funds in the US gained 13.3 per cent last year, according to the Morningstar LSTA Index and UBS forecasts high-single to low double-digit returns for this year. 

Higher yields than traditional fixed income and a pullback in bank lending has spurred capital committed to private debt vehicles to skyrocket to $190 billion last year, up from $98 billion in 2013, according to the American Investment Council.

Evergreen funds (also called perpetual funds or open-end funds) have emerged as the industry’s latest attempt to expand the private market. These funds offer lower minimums, somewhat more liquidity and transparency, and, unlike closed-end, limited partnerships, evergreen funds don’t lock up investor capital for fixed terms, which usually lasted 10 years or more.

"Lot of landmines" ahead
Nonetheless, private markets still pose “a lot of landmines” for investors, according to Katie Koch, CEO of asset management firm TCW. While “not a catastrophe,” Koch, a former Goldman Sachs partner, said loan defaults “will go up.” And, she added, “a lot of [private market] vehicles haven’t been tested yet when liquidity is not available.”

The most important task for advisors and investors is careful manager selection, said Dylan Cox, head of private markets research for PitchBook data, who moderated the breakout session. 

The dispersion between the performance of top and bottom quartile managers is “quite different” and more pronounced than investors are used to in the public markets, Cox said.

Unlike passive investments in public markets, private managers actively oversee company portfolios, execute investment strategies and navigate complex regulatory environments. As a result, Cox and other Morningstar speakers urged investors and advisors to carefully examine a fund manager’s experience and track record when conducting due diligence and before making an investment.

(To see a recent article posing questions about the scale and growth of private markets, such as in credit, see these articles here and here.)

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