Carlin (Nuveen): “Product innovation will grow private markets”

Eltif 2.0, evergreen funds and more. According to the Head of Global Wealth Advisory Services of the Asset Management company, the product structures are ripe to meet investors' needs and generate higher asset growth than the corresponding public asset classes

by Davide Mosca

The democratization of alternative investments is one of the major themes of interest in the current global asset management landscape. What will make the difference for the ultimate rise of private markets will be, according to Jeff Carlin, head of Global Wealth Advisory Services at Nuveen, a repeat of what has already happened in public markets where innovation in product structures has led to double-digit growth rates driven by passive management.

"As we have seen in liquid strategies, wrappers can make a difference. Now in illiquids we have the right product structures to attract more and more investors," explains Carlin, according to whom the vehicles that are likely to be most successful are those which are perpetual and evergreen.

High-potential progression

"The type of vehicles that collect and invest and then close their cycle is set to change," Carlin specifies with reference to the future primacy of perpetual funds. A further boost to the sector, in particular, in Europe is expected from the recent regulatory update, with the Eltif 2.0 regulation entered into force in January 2024.

"What the regulation makes possible is the construction of products that belong to the alternative asset class with liquidity and risk-return profiles such that they are attractive to a much broader investor base than in the past," says Nuveen's head of Global Wealth Advisory Services, confirming the importance of the novelty for the management house, which expects the alternative investment platform to grow at a faster pace than the offering of instruments that invest in public markets, although in the short term expectations are commensurate with going through a phase of change.

"Today $800 billion are allocated in alternatives in wealth management industry. The expectation is that by the end of 2028 there will be between $6 trillion and $8 trillion with, therefore, a tenfold increase in assets within four years, while the average allocation will be between 12% and 15% compared to a few percentage points today," Carlin analyses.

The time of private credit

The first segment to mature with this revolution will most likely be private equity followed by private credit and infrastructure,' the manager goes on to detail the asset classes in the private markets.

"Many of the instruments being launched in the markets today invest in private credit, as the banking system is less active in lending to private companies at the moment. There is considerable room for the creation of quality bond portfolios, as witnessed by the large number of transactions taking place at this stage," he adds, going so far as to define private credit as the asset class of the moment.

Private equity remains in a positive phase and another hot topic is energy infrastructure, according to Nuveen's Head of Global Wealth Advisory Services. "The transition is happening. It is something that is underway and we can already glimpse the moment when renewables will be the cheapest form of energy. An investment theme that is therefore set to last for a long time," he completes on the point.

Distribution and education go hand in hand

"Italy is a country that has historically had a large exposure to one asset class in private markets in particular, namely real estate. The concept of putting one's money in a company is actually not very different, but the cultural distance is still significant," Carlin points out in relation to our country

"What we observe in Italy, as indeed in the rest of the world, is that looking at allocation averages fails to capture investors' appetite for exposure to private markets. This is because there are not numerically many who consider the asset class. Those who do, however, possess two important characteristics: a medium to large size for their context and a large allocation share. This tells us that the barrier to entry is substantial. Very often it is a barrier of education and structuring, as well as of size, but once it is overcome, the exposure moves towards significant percentages"

Understanding the asset class and the specific characteristics of instruments remains, therefore, an action of primary importance and the subject of a great activity towards investors, with a multiplicity of positive spill-over effects at the various junctions of the savings value chain.

In market stress situations such as those that occurred at the beginning of Covid's acute phase in 2020,’ Carlin recalls in this regard, "any corporate bond portfolio suffered a large drop in value even though absolutely nothing was happening to the bonds within it. The rush for liquidity turned into a very high cost for investors who paid many percentage points to get their capital back. Conversely, those who kept the investment paid nothing and in the vast majority of cases continued in a profitable investment’. "This tells us that the cost of liquidity exists and can be significant. Investing in private markets removes this component by helping to stay invested and not fall into behavioral traps," he concludes.