A poll taken during a session on unlisted assets at the ASI digital conference on Thursday revealed that a whopping 79 per cent of funds are looking for opportunities in the next 6 – 18 months. While 21 per cent said they were reviewing their exposure to unlisted assets, not one single delegate was planning to reduce their holding.
The poll data aligns with the thinking of Claire Smith, head of alternatives at Schroders, who said the advantage of private markets that investors can eliminate the noise in the listed markets.
Further, she told delegates that the market is overly-focussed on the recent devaluations of the unlisted assets held within super funds. “But what about the volatility in the listed markets? What if you choose to exit your super fund when the market plummeted 30 per cent and then watch it rebound 20 per cent?”
In her view, there is a complete disconnect between the real economy and listed equities markets. “No-one knows what’s happening,” she argued. “So everyone is dancing around trying to figure out how to eke out the best possible returns from their portfolio. Liquidity is a nice risk to take when you compare it to all the other risks.”
Smith likes to think that dialling up one’s exposure to private assets immunises investors against wild market swings.
As for the record amount of money chasing private equity deals and pushing prices ever higher, Smith pointed out that there is a lot less capital searching for opportunities in the small and midsized segment of the market. And, a lot fewer deals. She avoids the big buyout deals.
“Small companies trade at a lower multiple than large companies, which in turn, trade at a discount to the listed market.” Further, she added, small and midsized companies typically have lower leverage and are probably financed by a local bank which she claims probably has more prudent lending restrictions than a private debt fund.
“These companies are better placed to outlast the pandemic since won’t have such a large debt service burden to worry about,” she said.
Regarding the private debt market, Smith told delegates that up until recently Australian investors were unimpressed with private debt as an asset class since they could only eke out a 2 per cent return or so depending on the tenor and the asset class.
“There was a lot of push back,” she said. “However, with COVID-19, private debt has shown resilience largely because of the proactive covenants that have been put in place since the crisis.”
During the session, Ross Israel, head of global Infrastructure at Queensland-based QIC pointed to new opportunities in infrastructure that have emerged because of the pandemic. Acceleration of key themes driven by fiscal stimulus include megatrends such as digitisation, decarbonisation democratisation.
That said, Israel conceded that managing assets now requires an “overwhelming” amount of active management given the potential liquidity and financing risks.