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Allocating to private assets in open-ended funds

Private assets such as private equity and private debt have come to the fore as a viable alternative for investors looking for returns that were not available in public markets. Investing in private assets may involve concessions on the liquidity of the investments, but their illiquidity premium and the breadth of the asset class can be seen as offsetting factors.  

What are private assets? It concerns capital used to invest in private companies – firms that are not listed on a public stock exchange.

In the case of private equity, capital can be used either to acquire private companies or for buyouts of public companies. It typically means active ownership: private equity investors invest in return for ownership and often gain influence or control over a company’s operations.

In the case of private debt, capital raised from investors is lent directly to both listed and unlisted companies or used for real assets such as infrastructure and property. It can be seen as an alternative to bank lending. Private debt can provide investors with exposure to returns which are more bond-like.

According to a report by McKinsey & Company (McLaughlin (2022)), assets under management in private assets grew to EUR 8.6 trillion (USD 9.8 trillion) by July 2021, marking an all-time high, as investors such as managers of private equity fund of funds, pension funds, endowment plans and family offices continued to commit capital.

Advantages and challenges

By including private assets, investment portfolios can gain potential advantages including greater diversification, enhanced returns and less risk. Moreover, private asset investments can have a positive impact on the sustainability performance of the investee company.

However, such advantages also bring challenges: 

  • The illiquid nature of private assets requires locking up capital for several years
  • The capital allocated to a private asset fund is not necessarily put to work in full or immediately. It is invested only when there is a suitable opportunity.
  • Neither is capital returned fully to a private equity or private debt fund investor on a single future date. Tranches become available when the private investment matures or is disposed of. As a result, cash flows from such funds can span several years.[1]
  • Investments typically involve larger amounts than buying listed stocks or bonds – the minimum size for participation is often too large for individual or retail investors. For them, this would constrain the diversification they could achieve or precent any access to private asset funds. 

For these reasons, we believe many investors, in particular individual or retail investors, would benefit from being able to invest in open-ended funds with a diversified and adequately managed allocation to private assets.

A dynamic recommitment approach

In our latest paper, we propose a strategy that uses a fully invested target allocation to private assets, which is kept constant over time in the portfolio by efficiently managing the cash flows of the underlying funds.

The proposed strategy invests in multiple private asset funds with different maturities while making sure the sum of capital at work from all the private asset funds is at the targeted allocation level throughout the investment period. This is done by committing capital to new vintages of private asset funds every year. The result is a dynamic recommitment approach.

Allocations to listed asset classes are used to manage the cash flows in the portfolio and the liquidity characteristics of an open-ended fund e.g., allowing investors to buy or redeem the fund once every two weeks.

A sufficiently large allocation to public assets can provide the buffer to deal with inflows and outflows at shorter-term horizons while allowing the allocation to private assets to return to the strategic target, in particular after larger redemptions.

The portfolio also needs to be adapted dynamically to changes in the asset allocation arising from market fluctuations without selling existing locked positions in private asset funds.

Private assets and open-ended funds

Our paper is organised as follows: 

  • We summarise the basic concepts of private assets.
  • We discuss how private assets are playing an increasingly important role in sustainability-related investing and how this is expected to drive significant growth in assets under management.
  • We review evidence of an illiquidity premium for both private equity and private debt.
  • We describe the dynamic recommitment strategy which allows an open-ended fund to invest in multiple private equity and/or private debt funds and manage the cash flows to make sure the allocation to the capital at work remains at the targeted strategic levels.
  • We investigate the behaviour of the strategy during the Global Financial Crisis of 2008 as a test case in stressed market conditions, and as a test case of the ability of the fund to provide adequate liquidity in line with the expectations for an open-ended fund.
  • We also provide a glossary of terms related to private assets for readers who are less familiar with the topic. 

We believe investment in private assets should continue to grow given their potential to enhance returns and reduce risk and the role they can play in sustainability-related investing.

We trust that this paper offers value in showing how asset managers can construct portfolios for open-ended funds that include allocations to private assets, providing a way for smaller investors to be able to gain exposure to this attractive asset class.

For the full paper, please download ‘Allocating to private assets in open-ended funds’


1 For example, 12 years is a typical lifespan of a private equity fund and 9 years of a private debt fund.


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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