The hidden risks in private markets for small investors
Unlisted assets have been lucrative for very rich investors, but mum and dad may be at the back of the queue if the sector hits trouble.
Big super funds and high-net-worth individuals have made large profits in the past from private equity and private credit.
But Independent Wealth Advice director Andy Darroch is extremely sceptical about mum and dad investors’ chances of making money at this point in the cycle.
“If you imagine private equity is a pizza, by the time it makes it down to the individual investor, I’d argue that you are not actually getting the crust, you are probably getting the cheese stuck to the top of the box,” he told The Australian’s The Money Puzzle podcast.
“All that good stuff has just been nibbled away because the amount of palms that need to be greased.”
Mr Darroch, who previously worked for the Macquarie Group, rejects private assets as a feasible route to riches for everyday investors, citing concerns over liquidity, high fees and a lack of transparency.
He is also concerned about liquidity. If there is a crash investors can sell their shares, but unlisted funds may freeze or partially freeze withdrawals.
Mr Darroch’s view is by no means a consensus view. Top advisers such as Charlie Viola of Viola Private Wealth have staunchly defended unlisted investments.
Mr Viola told The Money Puzzle earlier this year that it was a great way for investors to diversify their portfolios.
“It’s a democratisation of private markets giving investors access to areas that couldn’t get previously,” he told the podcast.
But Mr Darroch raises concerns that mum and dad investors, often encouraged by financial advisers, are increasingly targeted by the promise of high returns.
The sector has been a lucrative hunting ground, originally for the great university endowment funds of the US and later among local Australian players such as the Future Fund and major industry funds.
However, earlier this year sceptics had a field day when two of the world’s most famous funds – Yale and Harvard – sold off a combined $US7bn ($10.6bn) in unlisted assets, taking advantage of buoyant markets. Both universities said they remained confident around unlisted assets, but the sell-off marked a momentous change where the world’s most famous private investors, historically buyers, became sellers.
“The so-called Yale Model for private market investing was very important,” Mr Darroch said.
“So when you get leaders at Yale saying they want to get out, well that’s quite interesting.”
Earlier this month, the Australian Securities & Investments Commission launched a major review of the Australian unlisted investment sector expressing concern that some 14 per cent of funds controlled by the nation’s big super funds are now within the unlisted sector.
The regulator’s core concern is the liquidity risk for big funds. Put simply, could the funds get their money out if there was a worldwide crash across investment markets?
The same problem clearly faces individual investors. In fact, it could be worse for small investors who don’t have the deep pockets or corporate connections of the larger super funds.
History suggests that when there is a major crash, such as the GFC in 2007, unlisted funds can freeze assets for extended periods. Alternatively, they can partially freeze redemptions, which means investors can only get tiny amounts out from their holdings in regular intervals.
Mr Darroch said he advised his clients that if they insist they want to participate in unlisted markets, then they should consider big super.
“With these complicated products it’s hard to get a good deal. Honestly I’d just add the industry funds.”
Are everyday investors lining up as a soft touch for fund managers pushing unlisted assets?