Private markets investments: Five things to consider

They are complex, illiquid, expensive and risky - but they also offer significant opportunities. Depending on your investment goals and philosophy, private markets can be quite attractive. However, if investors are looking to invest in the equity or debt of an unlisted company, they should ensure they are aware of the risks involved, have a long-term investment horizon and work with the right wealth manager.

Here’s a summary of the five most important factors that private investors should consider if they’re interested in private markets.

1. Complexity

Private markets investments are complex compared to other types of investments. Like for equities, they require a greater risk capacity and tolerance, as expected returns may not be achieved and the investment may result in a partial or total loss. LGT therefore attaches great importance to providing its clients with comprehensive information about the characteristics of these investments and the opportunities and risks associated with them.

2. Manager selection

The success of a private markets fund depends to a significant degree on the investment manager’s expertise and network. As a result, the difference between the performance of the best and the worst private markets funds is much greater than for traditional investment funds. It is therefore pivotal for private investors to find the right provider; one who in addition to having the ability to identify the best investments, also has access to them.

3. Diversification

When investing in private markets, clients should ensure the greatest possible diversification. In addition, because it is advisable to stagger these investments over several years, and because the minimum investment is high for many investment programmes, investors should have access to at least five million Swiss francs or euro.

4. Life cycle

Investors usually invest in this asset class through closed-end funds, which in turn invest either directly in various investments or indirectly in other funds. Investors initially commit to an investment amount, but they don’t pay that amount right away. During the fund’s investment period, which typically lasts between three and six years, the fund manager issues numerous capital calls in order to make investments. During the distribution period, they then begin to distribute the proceeds from the sale of these investments. Towards the end of the agreed term, the fund manager sells the remaining investments, distributes the remaining proceeds and liquidates the fund. During this life cycle of typically ten to twelve years, the capital committed by investors is tied up to varying degrees, often making it very difficult to divest before the end of the term.

5. Portfolio weighting

There is no general rule here. In a diversified portfolio, the optimal portfolio allocation for private markets investments depends on individual assets, liquidity needs, risk tolerance and the investment horizon. In our experience, a strategic asset allocation to private markets investments of 20 to 25 percent may be appropriate for investors with a long-term focus.