We explain how incorporating private assets can improve clients’ investment outcomes.
Private assets can be a powerful tool for wealth advisers, offering potential to optimise returns for their clients while also managing volatility and risk.
Private markets investments not only offer the potential for positive risk-adjusted returns, they also bring differentiated risk-return dynamics that set them apart from their public market equivalents.
When considering allocating to private assets, factors to consider include:
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The size of the portfolio
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Existing asset allocation
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Investor risk tolerance
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Time horizon
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Liquidity and income requirements
Due to the inherent illiquidity of private assets, portfolios with increased allocation to private markets will have reduced liquidity compared to traditional public market-focused private wealth portfolios. However, through different allocation options they can also be a powerful tool to help private investors reach their investment objectives.
As part of this recent white paper, we examine four ways in which incorporating private assets can boost client outcomes, based on mirroring the 14% average allocation to private markets seen among institutional investors¹ with different combinations of private asset class exposures.
Figure 1: Average annual returns and volatility of a traditional public assets portfolio vs. private assets portfolio since 2014
1. Growth and capital appreciation
A tilt to private equity can help boost growth due to the multiple sources of added value available to a private equity manager.
For example, significantly overweighting private equity (and within that, strategies such as small and mid-sized buyouts), together with a smaller allocation to infrastructure, private debt and real estate, can offer the potential for higher and more diversified returns compared to traditional public equities and bonds, thereby enhancing the portfolio’s overall growth potential.
Our analysis below shows that when incorporating this allocation to a traditional multi-asset portfolio of 60% public equity and 40% bonds, there is a notable increase in return at a slightly higher level of risk, consistent with the objectives of a growth portfolio with capital appreciation as its main goal.
2. Enhance and diversify income
If the specific portfolio objective is to generate income, it may be sensible to overweight private debt given the regular coupons and attractive relative risk premiums, alongside the lower loss rates and higher net credit spreads, typically experienced across various types of private debt relative to public credit (as also explained in our previous paper).
Real estate and infrastructure assets, such as renewables, can also offer secure income traits. These asset types typically show low correlation with traditional asset classes, adding diversification and providing steady income streams through rent or usage fees.
Figure 2: Indicative portfolio allocation weighting for private assets portfolios
Figure 3: Indicative portfolio allocation weightings for combined public private portfolio
3. Capital preservation
Investing in private credit or infrastructure can be an effective strategy for preserving capital, so these asset classes should be the focus if this is the main portfolio goal. For instance, private credit investments, such as direct loans to private companies or private debt funds, can provide attractive risk-adjusted returns compared to traditional fixed-income securities without taking on additional credit risk, as noted above.
Real estate and infrastructure investments are another avenue for capital preservation. Infrastructure assets, in particular, generate steady cash flows through long-term, index-linked contracts or concessions, and their value often appreciates over time, which can contribute to long-term capital preservation.
4. Inflation protection
Certain private assets can offer the potential for consistent returns that outpace inflation. Renewable energy infrastructure is an attractive overweight option here, as often revenues, and so returns, are tied directly to inflation. This connection is typically supported by government-backed payments, which are typically linked to local inflation rates. This positive correlation with inflation helps preserve the real buying power of a portfolio, making investment more resilient over time.
Real estate, especially properties with stable income streams such as commercial buildings or rental properties, as well as private debt strategies that offer floating rate structures, can also serve as an effective inflation hedge.
Read our full analysis on the crucial considerations for wealth managers when allocating to private markets.
Explore how Schroders can help private investors access private markets.
New to private assets? Get started with our essential 101 resource on the Schroders Capital website.
[1] Schroders, Schroders Institutional Investor Study 2022.
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