Unlock Private Market Opportunities with Fidante

Private markets refer to investments that are not traded on public exchanges. This includes private equity, private credit, venture capital, and unlisted real estate and infrastructure. These investments give investors access to companies, assets and opportunities that are not available in listed markets and often involve longer time horizons and active ownership. 

Private credit is a relatively new asset class in Australia and has grown considerably in recent years. While the private credit opportunity may be moderating in the US, as was discussed by Challenger Investment Management in a recent note, interest among Australian investors may not yet have peaked. Private credit offers a number of benefits to investors, including attractive risk-adjusted returns, an illiquidity premium and diversification out of public markets. 

In the below article, we've listed a few key points to consider that can help to assess a manager’s competency and the resilience of their strategy if issues arise.

Investors can access private markets through managed funds, wholesale vehicles, co-investment opportunities or listed investment trusts that focus on private equity or private credit. These structures allow investors to participate in private market strategies while choosing a format that suits their objectives and liquidity needs. 

Find out more on Fidante's private market managers:

• Apollo Global Management
• Challenger Investment Management
• Proterra Asia

Value creation in private markets can come from operational improvements, revenue growth initiatives, strategic restructuring, cost efficiencies and well-timed exits. Private credit strategies may also generate value through structured lending, contractual income streams and strong downside protection. 

Private markets can help improve portfolio diversification because their performance is not tied to daily market movements. They often provide exposure to unique growth opportunities, steady income streams, and long-term value creation. Private markets can also help reduce short-term volatility and complement public market investments. 

In private markets, fund managers invest directly in private companies or assets. They may take ownership stakes, provide tailored financing, or work closely with management teams to improve operations and create long-term value. Returns are driven by business growth, operational improvements, income generation and strategic exit events rather than daily market pricing. 

Private markets can involve different risks compared with public markets. These include illiquidity, longer investment horizons, valuation uncertainty and operational risk within underlying businesses. Skilled managers help mitigate these risks through rigorous due-diligence, active ownership and structured investment processes. 

Private markets cover a range of asset classes, including private equity, private credit, venture capital, and unlisted real estate and infrastructure. Each asset class has distinct characteristics and potential benefits, from capital growth and business expansion to income generation and essential service infrastructure. 

• Borrowers
  Borrowers are typically private companies, including startups, middle-market businesses, and established firms seeking capital for growth, acquisitions, or restructuring. These entities often turn to private markets for financing when they cannot access traditional bank loans or public capital markets.
• Lenders
  Lenders in private markets may include private credit fund managers and institutional investors such as pension funds and insurance companies. These lenders provide loans or credit directly to borrowers, often in exchange for higher returns compared to traditional bank lending due to the higher risk and illiquidity involved. They assess and select borrowers, structure deals, and manage the associated risks to deliver returns to their investors.
• Companies Seeking Equity Capital
  Companies looking for equity capital from private equity include businesses looking to grow, deleverage their balance sheet, sell an asset or take their company private. The size of these companies includes everything from startups to mature cash flow generating businesses that are looking for private ownership.
• Private Equity Investors
  Private equity firms provide capital to unlisted companies in exchange for an equity stake in that business. They look to grow these businesses by improving operational efficiencies, enhancing revenue opportunities, and reducing costs. After increasing the value of the acquired businesses and diversifying across a range of businesses, they look to realise returns through a sale or IPO.

The liquidity mismatch in private markets highlights the gap between the illiquidity of investments and the liquidity needs of investors. To effectively manage this mismatch, investment managers employ a range of strategies and mechanisms, which are outlined below.

Investment Structuring
Private market investments are typically structured to align with the liquidity needs of investors. For example, funds may have lock-up periods, where investors commit capital for a set duration, allowing managers to invest in longer-term projects without needing immediate liquidity. Clear investment horizons and exit strategies are established to manage liquidity expectations.

Liquidity Mechanisms
To address liquidity concerns, private markets use various mechanisms such as:

• Secondary markets: Investors can sell their private market investments on secondary markets or through secondary fund transactions, though these are often less liquid and may involve discounts.
• Distribution streams: Investments are often structured with planned distributions over time, such as periodic income or capital returns, which can provide liquidity to investors as the underlying assets generate cash flow.
• Diversification and cash reserves: Private market funds often maintain cash reserves or invest in a diversified portfolio to manage liquidity. This strategy ensures that the fund has sufficient liquidity to meet investor redemption requests and operational needs while pursuing longer-term investment opportunities.
   

Redemptions in private markets are managed through several mechanisms including:

• Lock-Up Periods
  Capital is often locked in for a set time, preventing early withdrawals and allowing investment in illiquid assets.
• Redemption Windows
  Funds may offer redemption opportunities at regular intervals, such as quarterly or annually.
• Liquidity Reserves
  Funds maintain cash reserves or liquid assets to handle redemption requests without affecting their investment strategy.

In private markets, distributions are typically paid less frequently than in public markets. The frequency of distributions depends on the specific investment vehicle and its structure which is outlined in the fund’s offer documents. Some common practices include:

• Quarterly or Semi-Annually
  Some private market funds make distributions quarterly or semi-annually, particularly if they involve income-generating assets or have ongoing cash flows.
• Annually
  Many private equity and venture capital funds distribute profits on an annual basis, aligning with their investment horizons and liquidity needs.
• Event-Driven
  Distributions can also occur on an event-driven basis, such as after a liquidity event (e.g. sale of an investment, IPO) or a scheduled milestone, which can be less predictable but potentially substantial.

Private market managers may value their portfolios through the following methods:

• Valuation Methods
  Managers use techniques such as discounted cash flow (DCF) analysis, comparable company analysis, and recent transaction prices to estimate the value of investments. These methods help assess the worth of illiquid assets like private equity and real estate.
• Periodic Reassessments
  Valuations are typically updated quarterly or semi-annually to reflect changes in market conditions and asset performance. This regular reassessment ensures that the reported values are current and accurate.
• Third-Party Involvement
  Independent valuation firms may be engaged to provide objective assessments, adding credibility and accuracy to the valuation process. This helps mitigate bias and ensures reliable valuations for investors

Private market investments typically involve longer investment horizons compared to public securities, often ranging from 5 to 10 years or more. This extended timeframe allows managers to execute their investment strategies, nurture growth in portfolio companies, and realise value through liquidity events such as sales, refinancings or initial public offerings (IPOs). Some private market investment products are designed with an open-ended, evergreen structure allowing investors to continually invest new capital and redeem holdings at periodic intervals. However, given the liquidity mismatch between the Fund and underlying assets which often remain illiquid, these redemption mechanisms may not always be met and investors should be prepared to commit their capital for an extended period.