UBS: Remember, it’s not all the same

And it’s not all the same either when it comes to private markets, the umbrella term for investments in unlisted companies and assets. Characteristics and performance drivers differ widely within this varied asset class. 

Most investor portfolios can benefit from the addition of a broad private market allocation as a return and risk diversifier. But it makes sense to dive into the assorted types of private market investment and ask: How can private markets fit into long-term, multi-asset portfolios?

Private equity makes up the majority (70%) of invested capital. It consists of non-traded equity interests in unlisted companies, and represents equity-like risk in portfolios. The key sub-strategies differ according to the stage of the corporate lifecycle they target. Buyout targets leveraged control positions in mature companies generating consistent cash flows. Venture funds make high-risk, early-stage investments in startup companies. Another, often-overlooked strategy is growth equity, which makes unleveraged minority investments in proven companies to fund expansion or acquisition. Private equity strategies are actively managed and generate returns primarily through capital appreciation.

Private debt offers credit-like risk, and can complement public bond holdings in portfolios. Managers of these assets source, negotiate, and originate debt instruments with borrowers. The key sub-strategies target different seniority levels in companies’ capital structure. Direct lending focuses on senior secured debt; mezzanine targets subordinated debt with equity-like upside; and distressed focuses on control of over-leveraged firms through specific debt securities. Private debt returns largely consist of interest payments and other fees, though mezzanine and distressed provide potential for capital appreciation.

Private real estate strategies look to buy property, particularly in areas where active management can add value by improving asset quality. Sub-strategies differ according to how stable the targeted properties are. Core real estate targets highly stable, fully leased assets; value-add concentrates on assets with some scope for re-leasing or repositioning; and opportunistic selects development opportunities or properties that need major refurbishment, change of use, or repositioning. Private real estate generates returns from income and capital gains, less correlated to those from traditional asset classes.

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