How To Invest In The VIP World Of Private Assets

How To Invest In The VIP World Of Private Assets
Stéphane Renevier, CFA

about 1 month ago6 mins

  • Investing in private assets – that is, in traditional assets like debt, real estate, and equity, but off the public grid – can generate attractive returns and add diversification to your portfolio.

  • The biggest deals in private assets are unfortunately hard to access for retail investors – but tokenization could change that in the near future.

  • In the meantime, there are still ways for retail investors to invest: P2P lending, crowdfunding platforms, business development companies, publicly listed private asset companies, and interval funds are a few lesser-known but solid routes.

Investing in private assets – that is, in traditional assets like debt, real estate, and equity, but off the public grid – can generate attractive returns and add diversification to your portfolio.

The biggest deals in private assets are unfortunately hard to access for retail investors – but tokenization could change that in the near future.

In the meantime, there are still ways for retail investors to invest: P2P lending, crowdfunding platforms, business development companies, publicly listed private asset companies, and interval funds are a few lesser-known but solid routes.

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Private assets have been red hot over the past few years – at least, for the huge institutional investors who can get in on them. The problem is that this market and its big fat returns just aren’t very open to the average investor like you and me – at least not yet. And, sure, tokenization could change all that, but that development still seems a long way off. So, in the meantime, let’s take a look at these investments and how you can get in on the action…

What are these assets all about?

These investments – for example, private equity, private debt, or real estate – don’t change hands on public markets. They include things like investing in a startup, lending to a mid-sized business, or owning a part of a commercial real estate development. They’re a subset under the broader alternative assets umbrella, which includes everything from hedge funds to art to crypto ventures, in both public and private markets. Private assets are generally more like traditional debt and equity – but off the public grid.

These assets have been making waves in recent years, with big investors snapping them up for their attractive returns and diversification benefits. Though I personally doubt their ability to shield your portfolio against a market crash, I do agree they can be a nice source of extra returns. And yeah, when they work out, they can certainly provide higher returns than public assets – they’re less liquid (meaning you can’t get in and out easily), less transparent (you don’t get as much info on the underlying companies or assets), and therefore riskier, after all. But if you can bear those extra risks, there’s a pretty solid argument for slotting private assets into your long-term investment strategy.

That said, the private market’s doors aren’t exactly wide open. It’s currently a VIP scene mostly reserved for the bigwig institutional investors, with everyday retail investors and even the uber-wealthy often left peering in from the outside. It’s been that way forever, mostly because private assets are a complex, regulatory-laden, and less transparent world. They demand deep pockets and patience, because of their illiquid nature and the hefty due diligence, legal, and admin costs involved.

So will tokenization change all that?

It might – and let’s hope it will. Tokenization could be the key to flinging open those private market doors. Imagine slicing and dicing rights or assets into digital tokens, tradable on a blockchain. It’d mean you could own a piece of the pie, even if it’s just a crumb, in a simple, accessible, and liquid way. Picture a $1 million loan divvied up into 1,000 tokens, with each token launched as a $1,000 slice of the pie, tradeable on digital platforms. This approach would not only swing the gates open for individual investors, but also would tap into a vast capital pool, a much-needed lifeline for private fund managers who face a demand-supply imbalance. That could be a win-win for all.

And the opportunity here could be huge: individuals own over half of the world’s wealth, yet a mere 5% of that money is in alternatives – and even a smaller fraction is in private assets. What’s more, there’s a ton of immediate demand for this market, with about 40% of individual investors ready to bump up their investments into private assets in the coming three years, according to Bain Capital. That’s why major investment houses and digital platforms are starting to dabble in tokenization to get a piece of this action. Partners Group and Hamilton were the first major private equity firms to tokenize one of their funds, reducing the minimum buy-in for the funds to a ticket size of $10,000. Unfortunately, that’s still not available for retail investors. We’re still at the ramp-up stage, and patience is key. There are a few hurdles in the way – tech challenges, a need for better education, and a regulatory landscape that’s yet to catch up. So for now, tokenization is still mostly out of reach.

So in the meantime, what’s the opportunity?

That’s the good news: there are still ways for retail investors to invest in private debt and equity.

Here are the big ones.

P2P lending. This is a fascinating form of private debt where individuals get to play banker. Platforms like Prosper or Lending Club allow you to lend money directly to individuals or small businesses in exchange for interest payments. Of course, it may be risky, but that’s also why you’d pocket a higher yield than you’d get with traditional savings or fixed-income investments. If you follow this path, be sure to do your research and spread your investment across multiple loans. And keep in mind, you can generally start with a relatively small investment. You can read more about this kind of lending here.

Equity crowdfunding platforms. You could think of Crowdcube, Seedrs, Republic, Wefunder, and SeedInvest as your ticket to being a venture capitalist or private equity firm, but without the deep pockets. While services like these share a similar vibe with reward-based platforms like Kickstarter and Indiegogo, where you can back creative projects for cool perks, these actually allow you to buy a piece of a startup or small business. It’s a high-risk, high-reward prospect: if the startup hits it big, so does the value of your slice. But if it fails, you could lose it all. Some of these platforms also allow you to make loans to those businesses, which is safer but potentially less profitable. Read our guide here.

Business development companies (BDCs). These specialized investment vehicles are designed to finance small and mid-sized businesses, usually in the form of debt, but sometimes with equity. Since these things are publicly traded, retail investors can simply buy shares just like any other stock. That’s handy – plus they’re known for providing high dividend yields (some are close to 20%) and they benefit from preferential tax treatment. High-profile BDCs include Ares Capital Corporation, Blue Owl Capital Corporation, and Hercules Capital. While you can access them through ETFs like VanEck BDC Income ETF (BIZD; 11.17%), those don’t come cheap: their expense ratios are extremely high.

Publicly listed private assets companies like Blackstone and Apollo Global Management. Okay, so you can’t invest directly in the funds they manage, but you can buy their shares and at least gain indirect exposure to how their underlying private asset business performs. Just be aware that these funds have a broader investment scope beyond those BDCs, including huge-scale private equity, real estate, hedge fund solutions, and credit. If that all appeals to you, you could also invest via the Invesco Global Listed Private Equity ETF (PSP; 1.06%).

Interval funds. These are interesting: you can buy their shares anytime, but you can only sell them (back to the fund, not on the open market) on their schedule, not your own. It’s like having a “money out” door that opens only now and then – hence the name. It’s important to note that interval funds always invest exclusively in private assets. Sure, they typically invest in private equity and private debt, but they also play around in hedge funds, real estate, and other public markets. For an example of an interval fund that focuses on (mostly private) real estate, check out the Griffin Institutional Access Real Estate Fund.

One final note before you get started: just remember that investing in private assets is risky and most compatible with a long investment horizon. So, before you commit, make sure it fits your risk tolerance and investment constraints.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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