The democratisation of private assets
We were at a recent finance industry seminar when we first heard this phrase. What it meant was that ordinary investors could access the fabulous returns from opaque asset classes like venture capital, private credit and buyout funds. Just sign here.
But this isn’t the same as everyone having equal access to good funds. If you look at this 2013 diagram of the different returns from various asset classes you will see how wide the dispersion is when compared to equity investing. There can be little doubt that with the explosion of new entrants to the US$10 trillion private asset class industry in the last ten years the dispersion of returns will have only grown wider.
Source: Yale Endowment annual report 2013
One of the ironic things about financial markets is that the usual market forces don’t apply to them. For example, no one ever says “buy my fund, it won’t make you as much money but it’s cheaper than the others”. Instead, everyone is a winner (until the results come in), and after you’ve paid the fees. Again some managers will argue that it’s the performance fee that makes the difference, but consider this: you are a large investment manager and you have a choice: charge 1% on a public equity fund (guaranteed) or charge 1% - 2% on a private equity fund (guaranteed). Ignoring the potential performance pay on the private fund, which would you decide to set up and run? Clearly a private portfolio.
So on to the ‘democratisation’ of private assets. One of the great financial scandals was the 1980's Lloyds insurance market, where becoming a ‘Name’ at Lloyds was democratised and opened up to a wide range of often unsophisticated and inexperienced investors, so they too could access these legendary returns. However, the unsophisticated and inexperienced investors did not appreciate some syndicates were far better than others and not open to them, so consequently some did, literally, lose their house.
It’s not a joke to say that private assets are also known as an ‘access class’ as well as an asset class because not everyone can get into the good ones. Bearing in mind your money could be competing against a manager's Executive Pension Plan for an allocation, how can you be sure you are at the front of the queue? Like investing in property, it is always worth remembering that it’s stock selection that matters, not asset allocation, which is the reverse of investing in equities where asset allocation can be more important.
Please tread with care.