UBS Wealth Management Jersey Director and Senior Client Advisor Paul Raphael highlights the importance of manager selection when investing in private markets
What are private markets?
‘Private markets’ is a broad term for the range of strategies focused on illiquid investments that do not trade on public exchanges. Examples of these underlying investments include: a stake in a start-up company; non-traded senior debt buildings; and rental properties.
Investing in these types of assets requires a different approach and skill set compared with public markets investing. There is no continuous market or pricing for these assets, there is limited availability of relevant information for each asset, and transactions require time to negotiate and execute.
Yet these challenges and inefficiencies are precisely what make the opportunity set compelling. The potential for mispricing exists because many investors do not have the necessary time or information available to evaluate, invest in and help realise the potential intrinsic value of these assets.
Instead, private markets investments are primarily the domain of professional third-party private fund managers who are trained to make these investments on behalf of others. These managers raise locked-up pools of capital from institutions and individuals, which gives them the time and flexibility to source and assemble a portfolio of these illiquid investments and work with them to realise their potential.
Why use a fund manager?
Unlike in public markets, where the target opportunity set is defined by what is listed, private equity fund managers must actively source potential investments, as there are no centralised databases offering information or opportunities.
Some investments arise as a result of auction processes run by investment banks, but most are sourced directly by fund managers through their networks, research and active outreach.
Managers’ ability to source investments is a differentiator that can be instrumental in driving outperformance. The best private equity fund managers bring expertise, not just capital, to benefit their portfolio companies and drive returns.
Fund return dispersion is far wider than in equities and bonds
Private equity fund portfolios differ significantly from one another because they each own a completely different set of companies. In buyout and growth, typically only one fund owns a stake in a specific private company.
Venture funds will participate in financing rounds together with peers, but their aggregate portfolios are still quite distinct. This contrasts with public markets where many investors can own shares of a given company, and mutual fund portfolios are often similar in composition and performance. Individual private equity funds are each distinct, with a unique set of portfolio companies, hence overall performance is expected to vary widely.
Because individual private equity funds can generate a wide range of performances, investors allocating to private equity must pick and manage funds carefully. Their returns may depend significantly on the set of funds chosen and their relative strategy weightings.
Strong capabilities in manager due diligence and selection skills can improve the odds of constructing a portfolio of top-performing managers. Without these capabilities, investors could receive quite different performance than was expected when allocating to private equity.
FIND OUT MORE
UBS Wealth Management in Jersey has significant experience in private markets and can provide investors with selective access to some of the top-tier managers in this asset class. This level of expertise and support is essential when navigating this challenging yet potentially rewarding investment strategy. For more information, please contact:
Paul Raphael, Senior Client Advisor, UBS AG, Jersey Branch, 1, IFC St Helier, Jersey JE2 3BX
T: +44 1534 701107 E: paul.raphael@ubs.com
© UBS AG, Jersey Branch is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. UBS AG, Jersey Branch is a branch of UBS AG (a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051, Basel and Bahnhofstrasse 45, CH-8001 Zurich) with its principal place of business at 1 IFC, St Helier, Jersey JE2 3BX. Terms and Conditions are available upon request. © UBS 2019. All rights reserved. www.ubs.com/jersey
• This advertising feature was first published in the November 2019-January 2020 edition of Businesslife magazine