The above is the title of a recent Lex column with some interesting commentary on private equity and ‘the little guy’. In the usual Lex way, this was a short but incisive perspective on efforts by the private equity buyout industry to accommodate ‘retail’ investors by structuring funds so that they can offer some liquidity and also to reduce the time from commitment to investment. The Lex piece was not wholly enthusiastic, indeed ends with the following words of caution ‘…the structuring efforts required to make illiquid strategies suitable for the little guy should give all pause for thought’.
It is now widely acknowledged that investing only in listed markets misses out on the significant wealth creation opportunities (‘returns’) offered by private markets. This is of increasing interest to individuals. At the same time the ’large cheques’ (per Lex) are getting scarcer, with institutional investor allocation maturing for a variety of reasons (eg improving solvency levels may reduce the risk taking imperative). Thus the ‘smaller cheques’ (per Lex) which are currently underserved are an attractive source of future capital, hence the innovations[1].
As I pause for thought (per Lex), my initial reaction to the efforts to make something that is inherently illiquid, liquid, is the same as attempts to put a ‘quart in a pint pot’; there is bound to be spillage and some of the value from private markets investing will be lost. Private markets investing, like quantum mechanics, is subject to the Heisenberg uncertainty principle. In the strange world of quantum mechanics, the principle says that we cannot know BOTH the position and the momentum of a particle with precision. There is a trade -off, the more precision you seek on one parameter the less you have on the other. In private markets the two parameters are liquidity and return. There is a trade-off between liquidity and return (see below for some nuance on this, however).
The options to provide some liquidity for a fund invested in unlisted assets are (currently) limited. The Fund could invest part of the capital in listed assets. But this will reduce the expected return. Also this is a composition issue, the investor could do this themselves by simply reducing their allocation to unlisted and invest the rest in their liquid portfolio (and do so more cheaply). The Fund could find a mechanism to transfer rights. But this mechanism already exists, its called the secondary market. To generate rapid liquidity may require selling quality assets and or sell assets at a discount. Both likely to reduce returns.
Also the ‘retail’ market is a market of (largely) the unwilling. The risk capacity is likely to be low, the belief in long-horizon investing not fully understood. Also there is matter of cost and diversification. And why only focus on buy-outs, private equity investing is so much more then (leveraged) buy-outs.
At Treble Peak our focus is on the large (in AUM terms) market of the ‘willing’ and the under-served. Lets call them the ‘moderately high net worths’. Those with £1m to £5m of assets. Assuming say an allocation of 10% to 20% in unlisted assets (depending on whether they already have exposure to property) this means an allocation of £200,000 to perhaps about an £1m.
Most private equity funds have minimums starting at £1m, or higher (as they wish to focus on institutional investors only). Yes returns have been strong but private asset investing is not free of risk, so diversifying is critical to success. Assuming a minimum of say 4 fund investments, each ticket of our ‘moderate net worth’ investor is likely to be below the fund minimum.
So yes illiquidity can be an barrier but for those with a decent pot of savings seeking ‘pure private assets investing’ the real barrier has been diversified access. Even if they have the risk capacity diversified access was not always possible.
At Treble Peak we provide access to smaller tickets by aggregating them into a single LP of the fund. For the fund this results in raising capital from what has been to date an orphan area, and to do so without adding an additional administration burden nor any regulatory issues as Treble Peak provides the administrative and regulatory cover.
For the investors aggregation allows them to collectively act as an institutional investor. It permits access to high quality ‘pure play’ private equity opportunities and to do so in a diversified manner (the £200,000 allocation to private markets can be invested in 3 to 4 funds). Further for many of the funds we work with the total capital raised is at the smaller end (sub £500m, in many instances sub £250m). This means that even the smaller tickets sizes make a meaningful contribution to the fund raise and critically the smaller investors are valued investors (they are not second class citizens to the large institutions that often command the attention of the larger funds).
For us the opportunity is to provide the infrastructure that allows willing ‘moderate net worth investors’ with the risk capacity and ambition for returns to access pure play private markets investments and to be able to do so in a diversified manner. The opportunity set is not limited to buy-out funds but the full spectrum of the opportunity. The imperative is to invest in quality accepting of the lack of liquidity.
The current ‘risk off’ environment is presenting investors with opportunities that will accelerate investing and therefore distributions. A number of our funds are deploying capital quickly in companies with inherent value reducing the J curve. Also the secondary market is strong with good opportunities. Allocations to these funds will reduce the investing horizon meaningfully and accelerate the return of capital, thus enhancing long term liquidity.
Over time we expect that the market infrastructure to develop to meet liquidity (as needed or perhaps even continuously) and to do at a value closer to the NAV; we have to acknowledge that there are many challenges to get to this, not least understand the ‘Heisenberg’ impact, to accept that part of the excess returns premium from private markets investing is due to the lack of liquidity. Illiquidity is a friend. Adding liquidity optionality has a cost.
In the meantime we continue to serve the currently under-served ‘moderate net worths’. For fund providers this improves their margins (CFO’s love margin improvements) as it accesses a pool that is currently under-served and can facilitate access to ‘friends and family’, without them having to be super-wealthy, for investors they can diversify from listed assets, capture the ‘innovation and scaling/growth ’ premium available, and grow their wealth by investing in high quality private equity funds in a diversified manner. For society and the economy it will provide much needed real risk capital, something that remains scarce, especially in the UK and mainland Europe.
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The view below is the personal view of the author and do not represent the views of Treble Peak. This content is for information purposes only. Treble Peak does not provide investment or tax advice, and information on this website should not be construed as such. Potential investors should seek specialist independent tax and financial advice before investing in any alternative investment. Past performance is not a reliable guide to future returns. Your capital is at risk.
[1] According to Bain (Private Markets Desperately needs new market infrastructure, June 2003) individuals hold about 16% of the global private assets whilst having about 50% of global wealth. The ownership of private assets is concentrated with institutions such as pension funds and endowments.
