Several large name asset managers have recently declared their intention to lead the way on democratising access to private markets and offer retail investors an avenue to invest in high value companies, which together account for $7.4trn and are set to grow further.
However, this seemingly noble goal is tarnished as industry commentators are quick to highlight that investment trusts have been a long-standing way to gain access and can do so without the liquidity concerns.
Why the rush? Is there room for everyone? And why are over half of private equity investment trusts trading on double digit discounts?
Last week, BlackRock announced it was expanding its partnership with iCapital to increase access to its private markets product range. The week before Schroders brought its private markets strategies under a single brand and revealed plans for new funds, while JP Morgan Asset Management launched a new division, called Private Capital.
Commentators cite a perfect cocktail of supply and demand as driving the sudden rush to private capital.
On the one hand companies are staying private for longer, or sometimes, indefinitely.
“It costs a lot of money [to list], the regulatory hassle, the management time, the transparency (no one wants their salary splashed across the front page of the FT if they can help it), so the public market has got itself in a situation where it’s just not fun being a public company director,” explained Duncan Lamont, head of research and analytics at Schroders.
Since 2001, there have been about four times as many secondary fundraisings as IPOs in the US, according to a Schroders’ paper by Lamont.
Instead of going public these companies are finding more than enough private capital to keep themselves running.
“Google floated in 2004 and it had raised £25m capital before,” Lamont said. “Today companies are raising tens of billions of dollars. Private equity can take companies to a later stage, a larger stage, than would have been possible.”
It is no surprise a recent report from Morgan Stanley shows there was $7.4trn in private markets at the end of 2020 and they expect that figure to hit $13trn by 2025.
Traditionally, the majority of this money has been institutional. However, there is increasing appetite from retail investors and asset managers are only too keen to meet it.
“It is clear that over the past few years the rise of passive investing has given active managers food for thought on how they compete given passive managers have been taking large bites out of their lunch,” said Ryan Hughes, head of active portfolios at AJ Bell.
“The move into private markets is certainly one way for active managers to offer product that focuses on areas that cannot be attacked by their passive equivalents and therefore allows them to maintain their healthy profit margins.”
BlackRock and Neuberger Berman (NB) have opted for European Long-Term Investment Funds (ELTIF), which allow retail investors access to private markets.
NB’s private equity ELTIF allows “access to institutional-quality private equity expertise to advised individual investors,” explained José Luis González Pastor, managing director at NB.
However, a problem with this structure is liquidity, an issue that has left deep scars across the market.
“Private equity, by its own nature given the lack of a market place and time horizon of investments, is an illiquid asset class, meaning that you cannot sell the position when you want,” the NB managing director said. “Given its self-liquidating structure (as companies get sold, cash is distributed to investors), it provides periodic distributions to investors.”
Encroaching on investment trust space
NB is conscious that for some investors, illiquidity is a non-starter, and they also have an £817m private equity investment trust that has been in the market since 2008.
“Obviously for private equity the closed-ended approach is absolutely the right approach to be using as many people found out over the past few years with the likes of Woodford,” said Hughes.
However, looking at the private equity investment trust sector, 13 out of 18 are trading on double-digit discounts.
Much of this is down to cost. For example, £47.2m LMS Capital, which is trading on a 40.2% discount, has an ongoing charge of 5.84%, according to figures from the AIC.
However, it is also because other investment trusts are encroaching on their space.
Several investment trusts have been taking advantage of that capability, increasing their allocation to private markets. Baillie Gifford UK Growth trust and Fidelity China Special Situations have both said they will be increasing their exposure to unquoted companies this month.
Some trusts, such as the £19.6bn behemoth Scottish Mortgage, have long utilised this capability and their share price returns highlight the benefit. The trust has returned 866% over ten years compared to the Global AIC sector’s 339%.
While fund managers from all corners of the market are shoving their way into the private markets, the long-standing stalwarts are struggling to keep their head above the parapet.
“Private Equity trusts [are going to] have to work a bit harder and put themselves in the shop window a bit more given the mainstream managers are encroaching on their space,” commented Hughes.
“They are going to have to do a better job of justifying their existence. I would hopefully view that as a positive opportunity rather than a negative threat.”