Date: June 2024
Author: Dean Wetton Advisory

A Comparative Perspective

The 2023 Mansion House Speech heralded long-term reforms on pension schemes and sparked renewed interest in private investments through Long Term Asset Funds (LTAFs). The speech promised reforms which would help unlock additional returns and diversification by opening up private market assets, but as yet, this has not materialised. There was no follow-up in the King’s speech or the Budget. Various providers have pledged to invest in private markets but no new avenues to achieve this have opened up. If nothing has changed, should they be investing now?

The purpose of investing in private markets is to achieve something akin to equity like returns, but with reduced correlation to Global Equity markets. However, private markets often require increased costs and scales to access. There is therefore a more affordable asset class, which, on paper at least, intends to provide the same benefits: emerging markets.

The comparison is intricate. Private markets, despite higher costs, offer investors an expansive array of opportunities that can yield significant returns. They offer reduced liquidity, but in theory, this is rewarded with a liquidity premium. The reduced liquidity can often mean pricing appears less volatile, dampening the perceived risk of a portfolio invested in private markets. Emerging markets also present growth potential and risk management avenues but returns tend to be more volatile. Much like Private Equity, there can even be an element of reduced liquidity as stocks are traded more thinly.

This article delves into a comparative analysis of these investment domains, shedding light on their respective advantages and drawbacks.

Private Markets Demystified

Private markets encompass investments in privately held assets such as private equity, private debt, real estate, and infrastructure, which are not publicly traded. Historically, these markets have been the domain of high-net-worth individuals and institutional investors, offering the allure of potentially higher returns, although with increased risks and costs.

Advantages of Private Markets:

  • Enhanced Return Potential: The heightened risks associated with private markets can be counterbalanced by the prospect of substantial capital gains.
  • Exclusive Access & Diverse Opportunities: Private markets grant investors entry to a broader spectrum of investments and niche sectors, beyond the reach of public stock exchanges.
  • Diversification Benefits: Incorporating private market investments can reduce overall portfolio volatility by diversifying risk exposure.

Challenges of Private Markets:

  • Elevated Risk Profile: Investments in private markets are subject to greater risks, including less regulatory oversight.
  • Cost Considerations: Engaging in private market investments typically incurs higher fees relative to other market segments.
  • Liquidity Constraints: The illiquid nature of private markets can pose challenges for investors seeking to divest quickly.

Emerging Markets Explored

Emerging markets, or developing economies, are characterised by rapid growth, and increasing integration with global markets. While they share certain traits with developed markets, they also introduce investors to the dynamic growth potential of fast-evolving economies, accompanied by inherent risks.

Advantages of Emerging Markets:

  • Robust Growth Prospects: Emerging markets frequently exhibit high economic growth rates, offering compelling opportunities for investment.
  • Risk Diversification: By allocating investments across a variety of emerging markets, investors can effectively manage associated risks.
  • Technological Leapfrogging: The swift adoption of new technologies in these markets often gives rise to innovative business models.

Challenges of Emerging Markets:

  • Market Fluctuations: Political, economic and currency instabilities can lead to significant market volatility.
  • Regulatory Uncertainties: The potential for weaker regulatory frameworks in emerging markets heightens investment risks.
  • Inconsistent Returns: Despite rapid economic growth, stock market returns in emerging markets can be unpredictable.

Concluding Insights

Investing in financial markets requires a deep understanding of the diverse sectors available to investors. Both emerging and private markets present unique opportunities and challenges and can be important diversifiers in a well-balanced portfolio. Ultimately the decision to invest in one or both assets will be based on individual client factors of objectives, governance capability, asset size and cost constraints.

One must also consider the strategic position compared to the tactical position. While over the long term, an investor may decide that Private Markets will enhance the risk profile of their portfolio, the current market may well be overpriced. Investing too soon or too heavily may risk locking in an early loss.

Dean Wetton Advisory: Your Guide Through the Complexities

At Dean Wetton Advisory (DWA), we acknowledge the distinct merits of both private and emerging markets. We pride ourselves on providing clients with the market comprehension they need to make informed investment decisions.

Our specialists craft bespoke recommendations that resonate with the individual needs and financial capabilities of each client.

For tailored investment solutions, please email us on or call +44 20 3422 5000 to schedule a consultation.