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Alternatives
Diving into private markets
Alternative investments may expand opportunities for portfolio diversification, income and returns. Private market investments offer potentially uncorrelated risk exposures and return profiles that could help mitigate public market volatility, protect against inflation and improve returns.
However, we often hear concerns from investors who are new to private markets. Here we aim to shed light on some frequently asked questions.
Where did all the public companies go?
The number of publicly listed U.S. companies has plummeted since peaking at more than 8,000 in the mid-1990s. The rise of private equity allows companies to remain private longer, giving them time to establish themselves without market scrutiny and the rigors of quarterly reporting. More startups are waiting to reach unicorn status ($1 billion+ valuation) before going public or are choosing to be acquired rather than manage the uncertainties of an initial public offering.
Regardless of the business case, this well-established trend means private markets offer many more investment opportunities than the public markets.
A widening opportunity set is a key element of the private market advantage. The growth previously seen in public markets is now happening in private markets. Non-bank lenders now account for nearly 80% of loan origination, versus less than 30% in 1994. We expect the industry to continue shifting away from traditional financing sources such as banks and equity markets and toward private capital.*
- 153k
U.S. companies with 50+ employees - 181k
U.S. companies with $10M+ revenues - 3.8k
U.S. listed companies
How do individual investors access private markets?
Private market investments are increasingly available in more liquid and accessible structures, including publicly traded mutual funds and exchange-traded funds. We have also seen steady growth of innovative semi-liquid structures that bridge the gap between traditional and private markets. Commonly used vehicles include long-term asset funds in the U.K., European long-term investment funds, Luxembourg UCI Part II funds, reserved alternative investment funds and investment trusts.
- U.K. LONG TERM ASSET FUNDS (LTAFS)
LTAFs are open-ended funds, available to retail investors and authorised by the U.K.’s Financial Conduct Authority. They can invest in long-term, private market assets. As such they have notice periods for redemptions and deal infrequently. LTAFs are predominantly marketed to UK defined contribution pension schemes and to sophisticated and high net worth investors. - EUROPEAN LONG TERM INVESTMENT FUNDS (ELTIFS)
ELTIFs provide investors with access to private market investments. Introduced in 2015, the ELTIF regime was recently revamped by the European authorities to facilitate semi-liquid investment strategies. It can be marketed to all types of investors, including retail investors, across the European Union using its passporting capabilities. - LUXEMBOURG UCI PART II FUNDS
A fund set up under Part II of the Luxembourg Law on undertakings for collective investment (UCI) is an investment fund that can invest in all types of assets. Recently, it has become an option for private market semi-liquid investment strategies. It can be sold to all types of investors, including retail across the European Union. - LUXEMBOURG RESERVED ALTERNATIVE INVESTMENT FUNDS (RAIFS)
RAIFs are for institutional and professional investors, as well as some high net worth investors. They can invest in private market assets and have been used predominantly for closed-ended investment strategies. - INVESTMENT TRUSTS AND REAL ESTATE INVESTMENT TRUSTS (REITS)
Investment trusts, including U.K. REITs, have a fixed number of shares (described as closed ended) and are usually traded on an exchange. REITs are a popular vehicle for property investment, distributing a significant proportion of rental income to its investors.
Who should consider alternatives?
Investors have unique risk tolerances and liquidity needs, and alternatives can address specific concerns and desired outcomes:
- Explore asset classes that offer return potential but may be relatively less volatile
- Diversify traditional holdings beyond public equity and fixed income
- Consider new asset classes like real estate or farmland that may provide balance as more tangible assets
- Diversify direct investments in residential properties with a multisector, institutionally managed portfolio of private real estate
- Explore investing in startups and new businesses via private capital investments in private mid-sized companies
In this issue
Sizing up the state of office space. Trends are transforming offices around the globe.
Capitalizing on private capital dynamics. Ushering in a new Goldilocks era of growth and opportunity.
Looking beyond the horizon in real estate. Select real estate presents investment possibilities.
Endnotes
*Data source: Pitchbook LCD, 31 Dec 1994 – 31 Dec 2022. Non-banks include institutional investors and finance companies. Most recent data available.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk, and income risk. As interest rates rise, bond prices fall. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity, and differing legal and accounting standards. These risks are magnified in emerging markets.
As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. ESG integration incorporates financially relevant ESG factors into investment research in support of portfolio management for actively managed strategies. Financial relevancy of ESG factors varies by asset class and investment strategy. Applicability of ESG factors may differ across investment strategies. ESG factors are among many factors considered in evaluating an investment decision, and unless otherwise stated in the relevant offering memorandum or prospectus, do not alter the investment guidelines, strategy or objectives.
Nuveen, LLC provides investment services through its investment specialists.
This information does not constitute investment research as defined under MiFID.
