Considering private markets to drive returns and help balance client portfolios

Considering private markets to drive returns and help balance client portfolios

Until relatively recently private market, or unquoted, investing focused on two main areas: real estate and private equity. Over the last 20 years, the breadth of the private markets universe has expanded to include private debt, infrastructure and venture capital. This evolution has coincided with an expansion of investment structures, which has opened private markets up to retail investors as well as the more common institutional size counterparties.

Government-backed structures for retail investors, such as EIS (Enterprise Investment Scheme), VCT (Venture Capital Trust) and the recently introduced LTAF (Long term assets fund), are now used by financial advisers to help clients achieve their investment and tax planning goals. Private market assets are being selected as part of a diversified investment strategy to improve risk return dynamics within portfolios.


Why have advisers increased private markets allocations for their clients?


Breadth of Opportunity
In the UK there is a far greater number of unlisted businesses than listed companies. The Department for Business and Trade’s published estimate for the number of private sector businesses in the UK with up to 49 employees was 5.51 million at the start of 2023. In contrast, the latest London Stock Exchange Issuer List shows just under 1,900 companies quoted on the market.

Evidence also shows that companies are staying private for longer, or choosing not to list at all. By not allocating to private markets, investors would exclude an entire investable universe with potential for growth.
Enhanced Returns
Past performance suggests that private markets have outperformed public markets in recent times. Hardman & Co published a paper in 2021 that estimated the expected return on ‘scale-up’ investments is 15% per annum and the expected return on a ‘seed’ investments is 22% per annum. By comparison the 5-year annualised capital return of the Morningstar UK Small Cap was just 6% as at November 2023. Data on private market returns is still limited which must be taken into account when comparing these figures and private companies tend to be illiquid investments that are held for five or more years. In addition, past performance may also not indicate future performance.
Uncorrelated Returns
Whilst only a limited number of research papers have been written investigating the correlation between listed equities and venture capital, the available research, published by Sand Hill Econometrics, suggests that the correlation between venture capital and quoted equities is broadly similar to the correlation between bonds and quoted equities. Bonds are traditionally used as a tool to diversify and balance a portfolio of equities. The research suggests that venture capital will therefore have some helpful diversification characteristics relative to listed equities.
Developing UK Market
Several recent announcements by the FCA and the Treasury have provided signs of support for UK private market investment. In June 2023, the FCA set out new rules to give retail investors and more defined contribution pension schemes access to Long Term Asset Funds. In addition, the Chancellor’s Mansion House Reforms in July 2023 publicised an objective set by some of the UKs largest pension funds of allocating at least 5% of their default funds to unlisted equities by 2030.

Ultimately, investors in early stage private businesses run a higher probability of failure; however, these risks should be considered alongside the possibility of generating attractive returns. Investing in private markets can help create balanced client portfolios with attractive tax benefits whilst also supporting the growth of the UK economy.

As the market continues to develop, we expect private markets to feature more prominently across retail investors’ portfolios and a starting point may be accessing a pool of private market assets via a VCT or EIS fund ahead of the upcoming tax year end.

If you’d like to hear more regarding our research paper on private market investing in the North of England, contact the Business Development team via