6th June 2025
Investing in private assets is much in the news. The Mansion House Accord saw 17 of the UK’s largest workplace pension providers express an intent, on a voluntary basis, to allocate a minimum 10% of assets to private markets across all main default funds in their DC schemes by 2030, with at least 5% (i.e. half of that) of the total going to UK private markets. Long-Term Asset Funds (LTAFs) are being created to offer access to private assets via semi-liquid structures and you are, we are sure, aware of the attempts to rejuvenate the UK’s investment trust market if you are a regular reader of this blog. Sadly, we believe there’s too much noise and misdirection in much of the commentary around this issue and the point of why investing in private assets is a good thing is being lost.
- Private assets are not just private equity
Too many commentators are cynically (in our view) bemoaning the drive to get more investment into private markets as a way for institutional investors to offload low quality investments in private equity onto a new cohort of inexperienced investors or for greedy over-charging private equity managers to launch funds with high fees.
The reality is that private equity is just one of many private assets. An investment in private equity entails providing equity finance to fast growing companies in need of capital. But one can also provide debt finance. One can also invest in, and own, infrastructure assets (as opposed to companies), including renewable energy facilities, roads and hospitals. Real estate – both commercial and residential, and even social (care homes, GP surgeries) are also available.
And as for the track record of private equity managers…. As with any industry, there are bad and good actors. In the investment trust space, we are spoilt for choice, with a range of managers with frankly outstanding track records. Yes, private equity uses leverage to enhance returns, but to generalise and say that this is the only reason why PE outperforms listed markets is wide of the mark.
- Private assets diversify portfolios very effectively
We believe that a very effective way to invest in private assets is to identify those that diversify existing portfolios of listed equities and liquid bonds. Solomon Nevins addresses exactly this point in one of his excellent quarterly research notes (www.thefundreview.com). He finds that real estate and infrastructure assets, particularly if accessed via private funds, have almost no correlation with global equities (see his Sector Review Q1 2025, table 4).
Investments in private equity and debt offer fewer diversification benefits, but a good manager should be able to generate better risk-adjusted returns than more liquid equivalents.
- Private asset investment is a win-win-win proposition
As we have often said when discussing the merits of investment trusts, we believe private asset investment benefits all stakeholders. Investors gain diversification benefits and uncorrelated sources of attractive returns. The economy and a country’s population benefit as private capital can help finance vital areas of country’s social and economic infrastructure. The government benefits as it lacks the wherewithal (high debt loads) and expertise to invest in these areas itself.
- Mandation is everywhere
Many are rightly very wary of mandating any investor (especially pension fund providers) to invest in any asset class. Fund managers should be free to invest where they see the best returns. On the other hand, many others point to the tax breaks pension funds receive (tens of billions of pounds a year) that are not accruing to the Treasury and instead are helping finance the growth of other economies via investment overseas. Some mandation to invest domestically is a fair quid pro quo. Without wishing to state which side of the argument we come down on – we think both sides of the argument have a point and ultimately value judgements have to be made.
However, mandation is everywhere in the investing world. Investing with reference to a benchmark is mandation (higher weights in the largest assets). Being an extremely large pension fund is indirect mandation (forcing greater weighting to the most liquid asset classes and largest funds). Managing a fund in an Investment Association sector involves mandation (asset class upper and lower limits). We could go on. Mandation, if created on the basis of good arguments (even subjective ones), isn’t unusual.
- The “right” structure to invest in private assets
There is no silver bullet. Broadly speaking there are 3 main avenues for investors to access private assets (without buying them themselves!): limited-life private funds, evergreen semi-liquid funds (LTAFs) and listed closed-ended investment companies (aka investment companies). All have their drawbacks.
Limited-life private funds have been around for a while and tend to be only available to the largest and wealthiest investors. They carry high fees and are impossible to hold in structures that retail, advisory and some pension funds can own.
Investment trusts are fantastic. We use them extensively as they are the best way to gain exposure to private assets within daily-dealing funds such as those we manage. They offer managers a fixed pool of capital free from the pressures of redemptions and subscriptions and overcome liquidity mismatch concerns. However, as listed securities, share price volatility is considerably higher than portfolio value volatility and over short time periods, they can be highly correlated with equity markets. In addition, the shares of investment trusts can lack liquidity.
LTAFs offer open-ended exposure to private assets but on restricted dealing terms. For example, investors in these funds may only be able to redeem or subscribe 4 times a year (or even fewer) with a limit on the amount that can be redeemed in any one period. A sensibly-run LTAF must always hold liquid securities in anticipation of redemptions and this can prove a cash drag. These restrictions are necessary as the open-ended nature of the fund means there is a liquidity mismatch with the underlying assets. On the other hand the volatility of the unit price matches that of the portfolio value.
It is easy to criticise investment in private assets by pointing out the flaws of the structures created to access them. By recognising those flaws, a professional investor can use a blended approach and construct multi-asset portfolios that include private assets appropriately.
Conclusion
We conclude that efforts to channel private sector savings into productive areas of economies via private market investment (both domestically and abroad) are very welcome. All savers should have access to the diversification benefits and superior return characteristics of private assets. In this context, the development of new products to access these asset classes is to be welcomed, and we would continue to extol the merits of the investment trust structure to revitalise that market alongside the development of LTAFs. Finally, we would urge investors to read with scepticism those commentators seeking to label private assets as “private equity” – especially when they tar all providers of private equity funds with the same brush.
Ben Conway – Head of Fund Management
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