They are all examples of the kinds of private market investments that until recently have been largely ignored by the majority of UK charities, endowments and foundations.
In this article, we look at why institutions in this sector have traditionally been reluctant to invest in private markets and find out why the tide is beginning to turn. Can the asset class empower impact, enhance diversification and boost returns for charities, endowments and foundations?
A natural fit?
Key private market segments include private equity, private debt, real estate and renewable infrastructure.
Long-term investment horizons
Endowments, for example, have very long-term horizons (investments are usually held in perpetuity). Given that private market investments are also long-term, the asset class is potentially a natural fit for endowments to consider in place of short-term-focused equity markets.
Why then, have private market investments been unpopular with the UK charity sector including endowments?
- Risk aversion: charities have a fiduciary duty to protect the assets under their management. As a result, they have tended to prefer equities and bonds over private market investments, which have been viewed as opaque and higher risk.
- Lack of expertise: private market investments often require specialised knowledge and expertise to evaluate, manage, and monitor. Many UK charities have limited in-house resources and may not have the necessary know-how.
- Higher fees: private market investments often come with higher fees and costs compared to other asset classes. Many charities may be hesitant to pay these fees, as added costs could reduce the funds available to support their mission and activities.
- Illiquidity: private market investments are generally less liquid than public market investments, meaning it can be more challenging to sell or exit these investments quickly. This illiquidity can be a concern for charities that need to maintain flexibility in their investment portfolios to meet their funding requirements or respond to unforeseen circumstances.
While these considerations may have deterred UK charities, endowments and foundations in the past, US peers have a longer history of significant private market investments, inspired by the renowned multi-asset class Yale model.
Why private markets and why now?
We believe today’s UK charities, endowments and foundations can benefit from adding private markets to their portfolios, provided the investments align with their risk tolerance and financial objectives.
Here’s why they might consider taking a closer look at the asset class:
- Portfolio diversification: private market investments can offer diversification benefits, given lower correlations with mainstream asset classes like stocks and bonds. This can help reduce overall portfolio risk and volatility.
- Enhanced returns: private market investments have the potential to deliver higher returns than traditional asset classes. This can help charities achieve their long-term financial goals and support their mission more effectively.
- Access to unique opportunities: private markets offer opportunities that may not be available in public markets, including investments in innovative technologies, renewable infrastructure, or rapidly growing companies. These opportunities can provide both financial and impactful returns for charities.
- Long-term capital growth: many private market investments have a long-term focus, which can be well-suited to the investment horizons of charities. This long-term perspective can contribute to capital growth and help support the charity's mission over an extended period.
- Income generation: some private market investments, such as real estate or infrastructure, can generate stable income streams for charities, providing them with a regular source of funding to support their activities.
- ESG and impact investing: private market investments can provide greater opportunities for charities to engage in environmental, social, and governance (ESG) or impact investing. This enables charities to align their investments with their missions and values, while targeting financial returns.
Potential to make a positive impact on the climate transition
But private markets have yet to fully exploit investor demand for transition-focused strategies. Only $183 billion has been raised (or is currently being raised) in climate-focused private market strategies since 2016 (1). Therefore, there's scope for sustainable focused private market funds to have a significant positive impact on the climate transition.
Final thoughts...
It's essential for UK charities, endowments and foundations to carefully consider the risks associated with private market investments. These include illiquidity, higher fees, and the need for thorough due diligence. Working with experienced investment managers or consultants can help charities navigate these risks and ensure their private market investment strategies align with their objectives.
At abrdn we have several different private market funds, from diversified ‘one-stop’ solutions to specific sustainable infrastructure funds. If you would like to hear more about our offering, please do get in touch.
- Source: Oliver Wyman ‘Defining a climate strategy for private market investors’ 2023.