Private market investments – such as equity, debt, infrastructure, real estate, and natural resources – are playing an expanding role in portfolio construction for many institutions today. Whether it’s for diversifying factors, alpha generation, illiquidity premium, or the customization benefits not available in publicly traded investments, they have been increasing their private asset allocations considerably in recent years.

In fact, private capital assets under management have more than doubled in the past ten years industrywide to over $5 trillion by 2019. Sophie Del Campo, Natixis Investment Managers’ Executive Managing Director – Iberia, US Offshore and Latin America, has been closely watching this trend toward private solutions, especially in the Latin America marketplace. “We think this market will continue to expand, especially as investors look for ways to diversify away from more traditional equity and fixed income investments,” said Del Campo. She also points out that private investments continue to offer attractive fee levels, and these products can rarely be duplicated by passive management firms.

Institutional investors see an advantage to private market investments for a range of specific portfolio functions, according to Natixis’ Global Survey of Institutional Investors.1 Globally, 71% cite higher returns as a main reason for investing in private assets. Sentiment among Latin American institutions is even higher at 77%, while 68% say they go private for diversification.

Top Reasons for Private Assets
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Source: Natixis Investment Managers, Global Survey of Institutional Investors, conducted by CoreData Research in October and November 2018. Survey included 500 institutional investors in 28 countries.

But like any investments outside of traditional assets, private markets present a different set of risks and potentially higher costs. David Goodsell, Executive Director of Natixis’ Center for Investor Insight, believes many investors are prepared to make the tradeoff. “For example, in Latin America, eight in ten (80%) institutional investors surveyed say the return potential of private equity makes it worth taking the associated liquidity risks. Another 69% say the performance potential of private assets makes them worth a higher fee,” said Goodsell.

Going Off the Traditional Menu

After a decade of historically low rates, institutions see private debt and infrastructure as solid choices for income. Consider, in the table below, how institutional investors say they use illiquid alternatives such as private debt, equity, and infrastructure in portfolios.2

Top Portfolio Applications for Alternative Investments
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Source: Natixis Investment Managers, Global Survey of Institutional Investors, conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.

Diverse Private Expertise at Natixis

Natixis Investment Managers, a multi-affiliate platform of more than 20 specialized investment managers globally, continuously partners with several of its affiliates to deliver private investment strategies to institutional, family-office, and high net worth clients. “We have had strong private market capabilities for many years and continue to strengthen our offerings and innovate, especially in the equity space with Flexstone Partners, real asset debt with Ostrum Asset Management, real estate with AEW Capital Management, and sustainable natural resources-oriented solutions from Mirova,” said Del Campo.

To match a growing demand for private debt solutions, in 2018 Natixis acquired European Credit specialists MV Credit, a long-established UK-based credit manager focused on upper mid-cap private debt. The majority of the senior members of the MV Credit team have been working together since the formation of MV Credit in 2000. Together, they have successfully navigated numerous credit cycles.

Yield Opportunities Seen in Private Debt

With the days of meaningful yield from sovereign debt and blue chip bonds appearing to be long gone, the search for yield continues. Also, the range of viable options may seem to be narrowing as uncertainty of a market downturn and rising inflation increase. Rafael Calvo, Managing Partner of MV Credit, believes one of the solutions is investing in private debt and, specifically, leveraged loans.

“If the loans are senior and issued by non-cyclical companies with diversified sales channels, we believe the risks presented by a downturn are strongly mitigated. If the companies are, in addition, owned by reputable and financially strong private equity firms, the risks may be further mitigated,” said Calvo. Also, because leveraged loans have floating interest rates, the risks presented by rising inflation may be offset, too. Of course, no investment is recession proof, but MV Credit believes a strategy which incorporates the elements above may provide superior yields on debt, with relatively low risk.

Diversifying Factors of Private Real Asset Debt

One of the more innovative areas in private investments is real asset private debt. The asset class itself includes infrastructure, commercial real estate, aircraft, and commodities. Beyond that, lower correlation to that of public market securities and flexible structuring potential make this solution interesting to institutional clients, according to Del Campo.

Features of private real asset debt can include a hedge against inflation, as you have an underlying real tangible asset – such as real estate or wind farms – which is less correlated to public markets. Sector and geographic diversification and a stable income stream are other advantages. “This area of the private market really offers investors diversification specificity. You might be interested in US hotels or data centers, Italian retirement homes, or Mexican infrastructure. So you can really be selective,” said Joseph Falcone, Chief Operating Officer at Ostrum Asset Management U.S.

Illiquidity Premium Allure

In recent years, Falcone has noticed family offices, foundations & endowments, and other institutions reallocating money to private real asset debt investments after being disenchanted with the fees and performance of many hedge funds. The illiquidity premium of these buy-and-hold strategies, he believes, is a top attraction. “Limited liquidity for real asset private debt tends to result in higher margins. So at the end of the day, you may pursue better risk-adjusted return on capital than you can with a comparable senior, unsecured corporate debt,” said Falcone.

Private Equity in the Alpha-Driver Seat

Private equity investors, in aggregate, have often beaten public markets comfortably, after fees, over extended periods of time. That said, Benoit Jacquin, CFA, Managing Partner at Flexstone Partners, a global private investments firm with offices in New York, Paris, Geneva, and Singapore, points out the key phrase here is ‘in aggregate’. “There’s a range of returns across a rather wide private equity spectrum, with average returns hiding pockets of poor performance,” said Jacquin. Therefore, selecting the right private equity investment is paramount.

“Getting it right entails gaining access to skilled managers, choosing the right strategy, establishing the right legal framework and tax-efficient structure, and performing administration competently,” said Jacquin. Each part of the process must succeed and not all investors are capable of performing all these tasks to the necessary standard. This is why he believes providing private equity clients with customized strategies, structured by specialist advisors in tailor-made vehicles, is key.

Jacquin also points out that, while the world’s largest investors tend to invest at the larger end of the private equity market, there is plenty of value in smaller deals in the mid-market to small-market space. “The small- and mid-market private equity sectors offer opportunities for outperformance across most phases of the economic cycle. Investors also tend to pay lower entry multiples,” said Jacquin.

Priming Portfolios with Real Estate

AEW Capital Management, one of the largest real estate investment managers in the world, covers hundreds of different local real estate markets across the globe. Focused on investing in areas with positive trends – across property types, such as industrial, logistics, office, residential, retail, and leisure – Michael Acton, Head of Research, North America, sees strong signs in certain US industrial markets.

“Changes in supply chain management and the race to trim delivery time is a major factor,” said Acton. Further, in an era defined by instant gratification, he believes the lines between retail and industrial market continue to blur, a factor that should bolster industrial demand. Core assets in stable European locations, such as Belgium and Spain, are areas AEW is finding value in, as well.

Overall, as you look to realign client portfolios for uncertain, changing market cycles, now may be an opportune time to take a closer look at the diversifying and liability-matching potential of certain private market offerings.
1 Natixis Investment Managers, Global Survey of Institutional Investors, conducted by CoreData Research in October and November 2018. Survey included 500 institutional investors in 28 countries.

2 Natixis Investment Managers, Global Survey of Institutional Investors, conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.

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This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. All investing involves risk, including risk of loss of capital.

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