Investments, Private Assets

Private asset exits may be costly

Private assets Liquidity Debt Exit

Private assets can offer higher returns, but investors should be aware a quick, low-cost exit may not be possible during a downturn.

SMSF investors considering the inclusion of private assets in their portfolio should examine the timeframes and costs when exiting these funds alongside their risk and return profiles, according to a boutique investment firm.

Integro Private Wealth adviser Bryn Evans said there was a growing appetite among higher net worth and sophisticated investors looking to access unlisted private equity, credit, debt and infrastructure funds due to their potential to provide higher returns.

“We’re seeing some opportunities in the private credit space, given the increase in interest rates, where corporate credit is causing stress on the balance sheet of some companies,” Evans told smstrusteenews.

“There are managers that are offering very high yields, but you’re giving up liquidity so they are long-duration assets and you’re betting on the ability of the manager to assess the quality of the credit.

“People have also gotten into private equity and we see some of the prices that those businesses are being sold to private equity firms are quite high due to a lot of competition in that space.”

He pointed out while these investments offered good potential returns, investors needed to be aware of the risks, but also how they operated during a downturn.

“There are trade-offs and the most obvious is liquidity and it is very important to understand, particularly for retail investors, when a firm says their fund is monthly liquid, that’s because they’ve got a liquidity bucket, but that’s only maybe five to 10 per cent of the fund,” he warned.

“Over and above that liquidity bucket, the actual assets that sit within that fund are generally illiquid. If something happens in markets and investors look to exit that fund, and it does not have any more monthly liquidity, they will lock the fund when the bucket is dried up due to too many redemptions.

“The other thing we are seeing is when a manager is seeing redemptions over and above normal, they will expand the buy-sell spread.

“You have to be on top of that and understand if you want to exit this fund, the buy-sell spread might be significantly larger than what you would expect for a listed equity fund.

“So things might lock up or they might disincentivise people pulling money out by penalising on the selling price for the units that you’re redeeming.”


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