Expert: Adam Harrison, Titanbay Facilitator: Chris Shaw, Dundas Consultancy
Headlines:
- Market can’t expand too quickly
- In the current economic climate, we have to hope for the best in the short term, while our focus needs to be on long term solutions
- The feeling is that we probably need to pause for thought as there are a lot of new entrants and there aren't enough "unicorns" to satisfy new investors coming to the market
- Digital transformation and clean energy are attracting a lot of interest and should be the winners in this landscape
Discussion points:
At the moment there is more capital than there are good companies to invest in because more people are looking for private markets so there’s a risk that you will buy duds without conducting robust and diligent research.
Lots of PE firms are raising a lot of cash and there’s not enough quality to invest in. This point was reiterated around the table as a shared concern. The link was made that the last time we saw this happen was in property - everyone rushed into it but you couldn’t get your money out.
At the moment there's a discrepancy in returns between retail funds and private market returns. That difference is expected to narrow as more entrants come into the private market funds. We would expect to see the returns come down somewhat.
Having very good intelligence into private markets is crucial - it is an exhaustive process but which gives you something to go on and this tends to exclude Start-ups. Investments tend to be existing companies looking to release capital for shareholder exits or expansion.
There was a question around the consistency of our performance in the private markets funds which seems to be between 5 and 7 % - Titanbay feel it is their research which underpins that outperformance.
It was agreed that the reference to private markets is too broad and covers too many things. It was discussed whether investment trusts could fill a similar role to private market investments - the table accepted that the problem with investment trusts is there is such high volatility in the trading price this puts off people off, whereas PM funds are seen as long-term investments over a 10-year period.
Where the volatility of IT's appears too high for some investors to be able to cope with, with private market funds volatility isn’t monitored in the same way. In terms of public perception, you would be a lot less spooked by this.
If this market becomes more popular, will this take away the values of private market? This is where knowing about the businesses before anyone else does comes in. The investors get a good price and share the benefits. If more people are looking around then the price in the first place goes up and leads to a more competitive market and higher entry prices.
Titanbay have an existing track record and are experts in the market, enjoying better market intelligence, so the business owners who want to raise funds tend to find them as well as them finding opportunities.
So, what does the regulator think? The regulator is happy with the rules at the moment but they are expected to gradually soften these. You currently need to qualify as a professional investor to do this but the criteria you have to meet is expected to reduce over time.
IPO doesn’t seem popular but trade sales do - will this damage the market opportunity? Currently the regulator makes it protracted to get into these funds, but this is no bad thing as it means the market can’t expand too quickly.
It was discussed whether the regulator would weaken its position around advice with private markets and whether this would impact on the level of investment people have to put in. (Currently to achieve a diversified portfolio you need to put £125,000 per investment so the equation is you probably don’t want more than 10% of your exposed capital in invested markets - those with over £12.5 million in investable assets giving a portfolio of 10 % value of the portfolio would be the ideal).
In many ways pensions would be the ideal framework to hold private market investments because they are a long-term hold.
Where the institutions are putting private markets and funding at the moment is within digital and energy.
There was also discussion around solvency and capital charges.
Key Takeaways:
- It is crucial to only work with the best - companies that have significant experience and track record. Not all Private Market investments are equal!
- Absence of liquidity will always be an issue for retail investors
- Private markets will change in next 20 years and reach a mid-level
- You need a repeatable process for due diligence as well as a strong track record to look back on
- You also need a strong stable team with the resources, skill and credibility
