For many, the private markets asset class represents a road less traveled. Typically, investors focus on more traditional asset classes, like stocks and bonds, where information is often readily available and digestible, as it can often seem like the path of least resistance. Sometimes, however, sophisticated qualified investors increase their capital allocations to private markets for reasons they believe are compelling enough to make it worth taking the risk. The search for higher returns, diversifying return streams, and unique opportunities are just some of the key forces driving capital flows into the space. For investors who are less familiar or who have some exposure but remain underallocated, the same rationale may ultimately justify an increased exposure to private markets investing.
Of course, as with all important decisions, there are tradeoffs. Liquidity characteristics, the use of leverage, as well as limited regulation and transparency need to be understood and thoroughly analyzed at both the individual investment and portfolio levels prior to making any long-term commitments. Perhaps even more important is the need for effective manager selection. In conducting due diligence on managers in this space, it is important to consider their specialized knowledge and high level of complexity when it comes to the wide range of strategy types and structures and the high dispersion of returns among top- and bottom-performing managers. Ultimately, the most important decision for private markets investors may be selecting the right general partners.
This primer will provide an introduction to private markets investing, explore key reasons behind why investors allocate capital to the asset class, and evaluate some of the key risks and challenges that potential investors should consider. It will further discuss efficient cash management and the importance of good manager selection.
Private funds are available only to certain investors who meet the specific income, experience, and investable assets thresholds set forth by the U.S. Securities and Exchange Commission’s definition of “accredited investors” and/or “qualified purchasers” as necessary.
These types of investments may use aggressive investment strategies, which are riskier than those used by typical mutual funds and you may lose more money than if you had invested in another fund that did not invest as aggressively.
Investments that focus on alternative assets are subject to increased risk and loss of principal and are not suitable for all investors.
Please see additional important disclosures at the end of the article.