Market Insight by Nicolas Roth - Building portfolios fully dedicated to private markets

Private assets have often been considered the poor cousin of every asset allocation programme and have not received the adequate attention. Given how public markets behaved since the global financial crisis (GFC), this was not such a big issue and investors have been able to generate robust performance across public markets. But change might just be around the corner. 


All the excess liquidity pumped into markets by central banks since the GFC has led prices of risky assets to melt up with excess leverage and easy borrowing. However, as it seems clearer now that the era of central bank support is over and tapering will become a reality, investors are bracing themselves for more material shocks in public markets. This new market dynamic can be supportive for investors looking to review their allocation to private assets, partially protect against market gyration and generate substantial performance. But before piling into private equity deals and asset-backed loans, there are a few elements worth being emphasised.


Building private assets-only allocations


Like public markets, private assets are showing a tremendous amount of granularity and should be considered as such when starting to invest. Portfolio construction matters, strategy allocation matters as well as asset and manager selection obviously. Portfolios can therefore be built along several guiding principles, including ones that can be borrowed from the public market approach. Most asset allocations are a collection of investments in fixed income, equities, commodities, and alternatives. For a client making a leap of faith into private markets, transposing the traditional and well-known liquid asset allocation framework into private markets can be soothing. Fixed income is mimicked with private debt, equities are replaced with private equity and alternatives can host illiquid alternatives and other private markets strategies. The caveat, however, is that it requires a solid financial surface to be executed and reach adequate diversification. But if this is within reach, then investors can enjoy privates to the full extent.