Returns on conventional assets are likely to be muted in the future. Expected returns on private assets have fallen as well, says Alan Cauberghs, head of private assets at Schroders. But they can still offer between two per cent and four per cent or more over public assets.

“It is very hard to make the case that equity markets are cheap or even at fair value,” he says.
Debt markets are no more attractive. “If you look at the spreads, they are very tight,” he explains. “If you look at yields, they are very low. We see more and more issuance of government bonds, and we see more and more repackaging, so we have a repeat of 2006/2007.”

The solution, then, is to take on another risk — illiquidity — in exchange for meaningful returns. Which means private equity. “What a lot of investors are not yet realizing is that the public market is shrinking,” Cauberghs explains. “If you look at the number of companies that go from private to public, that number is shrinking. If you look at the number of companies that issue new debt, it’s actually shrinking.”

As with public assets, private markets “boil down to valuations because the most important factor that drives returns is actually your entry point: the price at which you buy the assets,” he says.

Here, there is a lot of money with the large buyout funds. But further down the scale, smaller companies seem more promising, particularly family enterprises, suggests Cauberghs.

“When family enterprises go from private to public, eventually, the drivers behind it are very different than in the case of large buyout deals.”

Similarly, smaller private debt deals are also attractive, in part, because some types of businesses — such as equipment leasing, physiotherapy, and education — are less tied to business cycles.

With portfolio positioning, “don’t think about formulaic asset allocation,” Cauberghs urges. “Think about what your portfolio needs to do. Secondly, think about how much liquidity you really need. For that part of the portfolio where you don’t need the liquidity, you can pick up part of that illiquidity premium.”

Still, governance poses a challenge, and the investment process is more complex — which can also be an opportunity.

“You have a much longer value chain,” he says, “so your returns are not just based on your investment thesis as in the public market, but also driven by things like sourcing, structuring, and the exit.”