Unlike publicly-listed investments, private market holdings can bring something different to a portfolio, with their diversification possibilities and range of income sources.
They can also be a powerful tool to help individuals reach their investment objectives, like helping a portfolio smooth some of the ups and downs of the stock market.
But as private assets don’t trade on exchanges, they’re harder to sell quickly. They’re also considered high-risk investments and are aimed at experienced investors with larger portfolios able to invest for at least 5-7 years, if not longer.
Why are private markets becoming more popular?
Private market investments are attracting attention for their potential to boost returns and improve diversification, a trend consistently supported by historical data.
But there’s more to the story.
Private markets let you invest in parts of the economy that you can’t through public markets.
Today, more businesses are choosing to stay private, so investors can access opportunities much earlier in a company’s journey, before it ever joins the stock market.
This is down to a combination of the increased scale of the private equity industry and an increase in the perceived cost and difficulty of listing on a stock market.
Companies are staying private for longer and more of the returns are being captured by private equity investors.
The private debt sector is also on the rise, especially as regulatory changes since the financial crisis have seen traditional banks step back, allowing private lenders to expand, particularly in direct lending.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, please seek advice. Private markets are considered high-risk investments aimed at experienced investors.
How can private markets complement your portfolio?
For years, the classic approach to building a portfolio has centred around a blend of shares and bonds, aiming to balance growth with stable income depending on different investment objectives.
However, for many, private markets can complement a wider, diversified portfolio and contribute to achieving specific investment objectives.
Combining existing public market investments with private equity, infrastructure, private debt or real estate could offer the potential for higher and more diversified returns compared to traditional public shares and bonds.
For those seeking a steady income, real estate or infrastructure projects could offer regular income that could be less affected by the daily swings of the stock market.
Some infrastructure investments also offer a hedge against inflation, because their revenues, and therefore returns, are often directly linked to price rises.
Remember though, all investments and any income from them will rise and fall in value and no returns are ever guaranteed. So, you could get back less than you put in.
How private markets can help you invest in different themes and sectors
Access to a wider and deeper pool of opportunities means investors can also invest in the companies and infrastructure needed to meet the needs of a changing world.
For many, the energy transition is a key theme for the coming years.
Reliance on fossil fuels for energy is slowly changing as renewables like wind and solar are becoming cheaper, more reliable, and increasingly central to global energy supply.
This competitive environment is driving massive investment into infrastructure projects, like wind farms, solar parks, battery storage and new innovations like green hydrogen.
Investing in these infrastructure projects through private markets could offer diversification through income streams that don’t move with the stock market. They could also help shelter portfolios against further inflation and rising energy prices.
What are the challenges to consider when investing in private markets?
Private markets can be complex, require thorough research and might not suit those who might need quick access to their money.
Investing in private markets involves higher risks if another party (a company or borrower) fails to meet their financial obligations.
There’s also more risk due to the infrequent dealing times that you might not be able to sell your investment quickly when you want to (liquidity risk) – so you should only consider investing if you’re happy locking your money away for at least five years.
Selling and accurately valuing how much private investments are actually worth can also be tricky.
All this means they’re generally best considered by those who have large portfolios, are comfortable taking on more risk and have a long-term view.
Investors should also take the time to research underlying assets and choose the right manager. As private funds operate without a benchmark, results can vary a lot between managers, so picking trusted partners is key.
Want to invest in private markets through HL?
Explore HL’s latest advanced investments hub to see how you can invest in private markets.