As Public Markets Rally, Private Markets Gain Appeal

As Public Markets Rally, Private Markets Gain Appeal

Donald Calcagni of Mercer Advisors breaks down the ins and outs of private markets investing.

Reviewed by: Staff
Edited by: James Rubin

Donald CalcagniDonald Calcagni, chief investment officer at Mercer Advisors, makes the case for why financial advisors should consider diversifying clients into private market investments.

Jeff Benjamin: Why invest in private markets now?

Donald Calcagni: In our view, the most important reason to invest in private markets is to access broader diversification. Nobel Prize winning economist Harry Markowitz once famously said that diversification is the only free lunch in finance. And it’s a free lunch that too many investors, sadly, tend to pass up. It’s perhaps surprising for most investors to learn that more than 85% of companies with revenue exceeding $100 million are privately held. For investors serious about diversifying their portfolios beyond public markets, and into smaller and arguably more innovative companies, investing in private markets is an absolute must.

But why has investing in private markets become more important for investors to consider? The uncomfortable reality is that public markets have become highly concentrated. Today, the Magnificent Seven drive most of the returns in the S&P 500 index, creating a scenario of highly concentrated portfolios for many investors. Two companies now make up about 20% of the market capitalization of the S&P 500 Index. Adding private investments to a portfolio reduces the correlation of portfolio returns to public markets and rewards investors for giving up some liquidity for part of their portfolio.

 That brings me to a second very compelling reason for why investors should consider private markets. And that’s the performance of private markets relative to public markets. From 2000 to 2020, the median buyout private equity fund, for example, outperformed the S&P 500 by about 6% annually over that 20-year period. We see a similar pattern in other private asset classes. For example, private credit outperformed high yield publicly traded bonds by about 2% or 3% annually over that same time horizon.

JB: How does private equity investing work at Aspen Partners?

DC: We built Aspen Partners to bring a fiduciary-centered approach to private markets. With that in mind, Aspen funds are funds of funds vehicles designed to provide investors access to high quality, top-quartile private funds underwritten and selected by our experienced private markets investment team. 

We started with two funds of funds—one focused on long term growth through allocations to private equity and venture capital; and one focused on income through allocations to private credit and hedge funds. Each fund will diversify across between eight and 12 underlying funds.

Each fund has a minimum investment of $100,000. For clients of Mercer Advisors, we’ve capped fund fees for the funds of funds at 0.19%, which is the cost to operate the funds. 

JB: What kind of investor will this appeal to?

DC: I think those of us who’ve invested in public markets since at least the 1990s have experienced more than our fair share of bear markets, financial crises, flash crashes, accounting scandals, global pandemics, and more. The big takeaways from those experiences, I think, is that building long-term all-weather portfolios is critical to portfolio longevity and long-term growth and that doing so requires diversification beyond public markets. So, we believe that private markets, and specifically our offering, appeal to investors in search of a better long-term investment experience; those who seek superior long-term diversification; those who are willing and able to give up some portfolio liquidity in exchange for higher potential returns; and, finally, those in search of a lower cost approach to diversifying within private markets.

JB: What are the fees and lockup periods?

DC: Investors have access to Aspen Partners with zero platform fee and a 19 basis points maximum expense ratio, and no additional performance fees.

Fund life expectancies vary by asset class, but seven to 10 years is what investors should expect.

JB: What are the risks that advisors and investors should be cognizant of when it comes to private markets?

DC: The biggest difference with investing in private market investments is the illiquid and long-term nature of the investments. It’s important for an investor in private markets to truly assess how much capital they’re willing and able to commit to illiquid, long-term investments. Further, unlike in public markets, manager selection in private markets is absolutely critical because the dispersion in returns of private markets funds is significantly greater than those in public markets. And private markets information and data can be complex and opaque, making it difficult for inexperienced investors and advisors to understand.

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.