In a recent report, Mr Higgins says private equity, credit, real estate and infrastructure are now seen by regulators as structurally significant and vital for the future of capital markets.
“The growth of private-market strategies is accelerating rapidly. Significant capital is flowing in, and the strategic role these assets play in portfolio construction cannot be ignored,” Mr Higgins says.
“As public market volatility grows, private markets can provide the diversification and growth investors are seeking, but only for investors with the right risk profile.”
Once exclusive to large institutions, Mr Higgins says private markets are now more accessible via open-ended ‘evergreen’ funds. However, with significant growth resulting in over 450 funds in the Australian market, questions about liquidity should be at the forefront.
“Private assets are private for a reason - housing them in an open-ended fund does not create additional liquidity in the assets themselves. Natural liquidity stems from the underlying assets, not the fund structure.
“While the liquidity frameworks in open-ended funds are usually significantly more sophisticated today than in the past, liquidity crunches are not new. Fund freezes have been common in these strategies over the past 25 years.”
Mr Higgins says manager selection and operational execution are essential in unlocking the strategic value of private markets.
“Private asset investing requires expert portfolio construction, liquidity management tools, stress testing, and vigorous valuation frameworks,” Mr Higgins says.
“When applied thoughtfully, private markets offer diversification and the potential for strong long-term investment outcomes. But investors must seriously consider the liquidity constraints, manager skill and underlying governance of each opportunity.
“Investors should also consider how illiquidity impacts asset management, not just portfolio management. This is critical in real estate and infrastructure where operational assets need ongoing capital expenditure.”
Higgins says that while private markets can be compelling for those seeking to access assets which have many attractive aspects in a portfolio context, illiquidity is a defining feature and key driver of their characteristics.
“The full potential of private assets is often only realised within strategies designed for liquidity limits, so broader portfolio construction decisions are critical for optimal outcomes,” he said.
“As private markets products proliferate, transparency, governance and investor education are critical to avoid a repeat of the issues the sector has faced in the past.”
