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Wayne Yi shares his perspective on the value of adding private markets to client portfolios
Key Takeaways
- The differentiated returns that private investments can generate over the long term may lead to a more robust and resilient portfolio over time.
- The heterogeneous nature of private investing makes it critical to find the right managers who understand the underlying assets, and can execute their strategies well over the long term.
- Private investments are long-term and illiquid, so it is crucial for advisors and clients to be aligned on the client’s expectations for returns before making an allocation.
Transcipt
My name is Wayne Yi. I'm the chief investment officer at Simon Quick Advisors. We're an RIA based in New Jersey, but with offices across the country. We, as a firm, started investing in private assets because it provides a more diversified, more robust investment opportunity set than what you may find in traditional stock and bond portfolios.
Some of the advantages of private assets are that you can invest for the long term with a differentiated and typically much higher return expectation than what you might find in a public security. These opportunities are much more idiosyncratic and different than the broader markets. The investor or the general partner in those situations tends to be much more active and engaged in driving value and is really in control of their own destiny in terms of finding that exit opportunity to maximize the value for themselves and the LPs that invest alongside them.
Traditional equity and fixed-income investing have become commoditized to some extent. So, looking for that additional return driver, differentiation, and diversification in a client's portfolio is an important element that every advisor and investment individual is looking for. Private assets afford an opportunity by providing a differentiated way of driving returns on different types of assets and businesses that would separate one advisor from another and one investor from their peer. There is a different perspective you could take in those roles. However, the opportunity set is large, differentiated, and hard to access versus buying something off the exchange.
These elements are more complex and unique and can deliver a higher level of return. I would even argue there is probably greater confidence in the expectation of return from your portfolio than a traditional public-only portfolio might deliver. What we, as advisors, must consider alongside the client that's putting their money to work is how private investments align with their existing portfolio or a more liquid portfolio. Obviously, if I say that you get meaningfully higher returns via private asset investing, individuals would be really interested and attracted to that. But the considerations one must take are that they tend to be less liquid.
These are smaller businesses and require a much longer holding period than just owning a Tesla stock or a Facebook stock, which you could buy and sell at a moment's notice. These are businesses that you own typically through a business cycle or over several years to maximize the return opportunity. In that same regard, you have to be very strategic because you can't just sell it tomorrow. It takes time to find the right buyer and to execute on that transaction, as well as to find the right opportunity that you want to invest in.
There are many different ways of taking advantage of the opportunities, whether it's sizes of businesses, the small startups versus the established cash flow-generative businesses, certain industries, whether it's technology, manufacturing, or healthcare. Via private assets, you can be very strategic in terms of what kind of businesses fit within a client portfolio and how that may make a portfolio more robust or more resilient based on the underlying positions and investments that you make.
In addition to the lifecycle of the underlying businesses, there are businesses that can be more mature, generate a lot of cash flow, and are, quote-unquote, lower valuation versus a startup that can be a multiple returner over a period of time. However, there's greater risk and reward to those situations. Understanding what the client's needs and expectations for return on illiquid assets is important, and finding the right manager that can execute on that strategy over time is highly critical.
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