Private Markets: A Viable Alternative to Stocks
With the U.S. stock market in the midst of a three-year bull run, many investors no doubt are looking back at their equities gains and wondering why they should put money into anything else.
But such a fixation on the recent past could be a breeding ground for complacency, warn various investment and wealth managers. In particular, it could blind investors to the gains that could be had from private equity, private credit, and other alternative markets for investors with spare cash and the stomach for a little risk.
Private markets are huge, but clients don’t talk about them much
Brian Griggs, the head of portfolio strategy and solutions at the investment management firm Nuveen, agreed that many investors are no doubt feeling pretty comfortable with the returns they’ve secured from public markets in recent years.
Doug Huber, deputy chief investment officer at the large RIA Wealth Enhancement Group, has detected signs that investors are growing curious about going beyond standard stocks and bonds.
Big wealth managers’ role in helping advisors sift out risky private investments
Nuveen, WEG, and Dynasty are among the firms positioning themselves as gatekeepers to these sometimes risky, but also often profitable, markets. Charles Schwab is also moving into a similar position with its announcement this week that it will buy the private shares marketplace Forge Global for $660 million.
At Dynasty Financial Partners, chief investment officer Bob Shea said his firm’s service offerings include help for advisors sorting out good private investment opportunities from downright treacherous ones.
Net worth isn’t everything. Free cash matters, too
With their liquidity barriers, private markets are in many ways the most natural fit for the ultrawealthy. Griggs at Nuveen, though, said net worth isn’t the main consideration; more important is the amount of spare cash investors can afford to lock up for years in search of higher returns.
Using spending habits and free cash as a gauge, Griggs thinks far more investors could be moving beyond standard stocks and bonds. He said Nuveen will recommend as much as 20% to 30% of ultrahigh net worth investors’ portfolios be in private markets.
Millennials vs. boomers, and fewer publicly traded shares
The Goldman survey, conducted in July and August, also revealed a generational divide. Among millennials (often defined as being born between 1981 and 1996), 1 of 5 have put money into alternatives and just over half said they perceive private markets as a way to invest in growth industries. Among baby boomers (born between 1946 and 1964), the allocation to private markets fell to 6%.
One development often cited by advocates of private markers is the great drop in companies listing their shares publicly. The Securities and Exchange Commission noted in a recent report on opening private markets to retail investors that the number of publicly traded companies has plummeted between 1996 and 2004 from 8,000 to 3,700.
If stocks slow, are private markets the best alternative?
Diversification is still one of the biggest reasons for getting into private markets. The Goldman survey found that many investors consider private equity, private credit, and other alternatives “high risk” — a label deemed appropriate by 56% of the respondents.
The main counterbalance inventors wanted for those perils was diversification. Fifteen percent of the respondents cited portfolio diversity as their No. 1 goal for investing in alternatives, ahead of the 13% who said they were primarily seeking enhanced returns.
Griggs at Nuveen said private markets’ promise as a diversifier has become only sharper as questions hover over the stock market’s ability to maintain its recent gains. Arguments have become common that public shares are overvalued.
Equities wouldn’t even have to go into bear territory to be a drag on clients’ portfolios. With inflation running near 3%, returns need only fall back from their recent highs before price increases start eating into the money investors have stowed away.
Griggs said again the temptation for many advisors and clients is to look back at recent equity returns and assume they can keep obtaining more of the same. He’s not so certain.
