In a world that loves transparency, alternative investing, especially of the opportunistic kind, requires a tolerance for opacity, Scott said.
“We kind of forget why we buy listed securities. It’s more than just a clearinghouse. It’s not just continuous pricing or continuous disclosure obligations. There’s a level playing field for all investors. We don’t tend to get this as much in private markets,” he said. “You’re going to have different access, not just price, but asset class, asset type [and], depending on the institution, the size of the commitment they can make.”
More Access
And yet, private investments are coming to the masses, Wiek said. In the last two years, regulatory changes, fund manager efforts, new and expanded retail offerings, retirement savings shifts and return-chasing all have made even the chanciest of private investments an option people want, and the demise of the defined benefit plan has played a role.
“There’s the idea that if you had exposure through your pension to private markets, why shouldn’t you be allowed to have [them] in your 401(k)?” she said.
Those rule changes included the Department of Labor allowing certain private equity funds in 401(k)s, updates to the accredited investor definition and SEC-expanded access to equity crowdfunding.
“As I suspected two years ago, mass access to private equity investing is going to happen through target-date funds,” Wiek said. “It’s not going to be an option in your 401(k) plan that you can select. It’s going to be part of a diversified portfolio package.”
The masses will also get into alternatives through real estate investment trusts, master limited partnerships, ’40 Act interval funds and funds of funds, she said.
But the category should still come with a warning label.
“Private market data is private, it’s opaque,” she cautioned. “The reason PitchBook exists is we spend all of our time out there scanning news, press releases and limited partnership documents to come up with performance, and it takes a while to come up with that. Returns have been outsized and phenomenal. But people should realize that won’t be the case going forward. I expect the returns will be retracting shortly.”
To drive home her point, Wiek noted that the top quartile of venture capital managers have returns exceeding 35%, but the bottom quartile managers have returns worse than negative 5%. “That’s a pretty wide range. If you pick the wrong manager you’re not even going to come close to getting what the median manager is getting.”