With public markets’ recent volatility, investors are increasingly looking to private markets to not just generate larger returns but to mitigate risks. Fortunately, says Paul Bodnar, Chief Investment Officer, Partner, at CM Wealth Advisors, there’s much more to the private capital space than private equity and venture capital.
“There are a number of private assets beyond private equity and venture capital that can be added to an investment portfolio to provide an equity-like return and greater downside protection,” Bodnar says. “However, these investments are often in more niche spaces. They require deeper knowledge and sophistication in private markets to diligence and understand their place in portfolios.”
Smart Business spoke with Bodnar about alternative private investing opportunities.
Why add other private investments beyond private equity and venture capital?
Most assets, from the public markets to private equity and venture capital, have shown that they’re exposed to the repricing of equities — just as the valuations in the public markets change, so do those in the private markets.
For example, in 2022, public equities were down 18.5 percent. The headline number for venture in 2022 was down about 15 percent according to Cambridge Associates. Venture interests in the secondary market were often selling at less than half of the price of recent peaks. When public markets reprice, equity prices in private markets follow a similar path.
However, the addition of diversifying, non-correlated private assets that perform across a cycle can help portfolios weather storms, generate income and still provide excess return over public equities. At times, that might mean giving up the level of upside of an asset class like venture, but it’s also trimming the downside. There’s an opportunity to earn low-to-mid teen returns from diversifying assets with less risk and volatility than public and private equity.
What are some private investments that fit this profile?
Real estate is a well-known private investment asset, but there are other options such as infrastructure, private credit, and other niche asset classes like legal and intellectual property claims.
Infrastructure could mean investing in a pipeline that supplies water to a major city. In good times and bad, people pay their water bills. It’s an investment that’s expected to deliver a return in the mid-teens while also offering inflation protection.
There are investment opportunities within real estate sub-markets such as marinas, marina storage and RV storage. Those asset classes are often not professionalized, limited in terms of new capacity and are typically assets that can do well both in good times and bad. These all have a current income component and limited downside risk with a conservative capital structure.
Another non-correlated area is legal and intellectual property claims. Investors can place capital with a group that purchases intellectual property from companies that see multiple parties infringing on existing patents and seek enforcement in various jurisdictions.
All these investments can perform well independently of movements in the public equities market.
What should investors understand about these opportunities before investing?
Private market investments can come at the cost of layers of fees, so it’s important to understand those and know what’s fair in the marketplace. Non-institutional investors often use feeder vehicles, aggregators, or are subject to different fee schedules. These can become a significant drag on returns. Additionally, direct deals offered to investors in areas like real estate can have particularly unfavorable fee schedules. In some deals, the general partner/lead investor pushes all the downside risk to its limited partner investors, risking little capital while retaining the upside, creating a poor return profile for limited partners.
Interested investors should work with a group that has a track record and deep experience in private markets with a team to support it. It takes time, relationships and know-how to find the right markets and best teams. ●
INSIGHTS Wealth Advisory is brought to you by CM Wealth Advisors
