Asset Allocation and Private Markets: A Guide to Investing with Private Equity, Private Debt, and Private Real Assets (Wiley Finance)

The comprehensive guide to private market asset allocation Asset Allocation and Private Markets provides institutional investors, such as pension funds, insurance groups and family offices, with a single-volume authoritative resource on including private markets in strategic asset allocation. Written by four academic and practitioner specialists, this book provides the background knowledge investors need, coupled with practical advice from experts in the field. The discussion focuses on private equity, private debt and private real assets, and their correlation with other asset classes to establish optimized investment portfolios. Armed with the grounded and critical perspectives provided in this book, investors can tailor their portfolio and effectively allocate assets to traditional and private markets in their best interest. In-depth discussion of return, risks, liquidity and other factors of asset allocation takes a more practical turn with guidance on allocation construction and capital deployment, the “endowment model,” and hedging ― or lack thereof. Unique in the depth and breadth of information on this increasingly attractive asset class, this book is an invaluable resource for investors seeking new strategies. Discover alternative solutions to traditional asset allocation strategies Consider attractive returns of private markets Delve into private equity, private debt and private real assets Gain expert perspectives on correlation, risk, liquidity, and portfolio construction Private markets represent a substantial proportion of global wealth. Amidst disappointing returns from stocks and bonds, investors are increasingly looking to revitalise traditional asset allocation strategies by weighting private market structures more heavily in their portfolios. Pension fund and other long-term asset managers need deeper information than is typically provided in tangential reference in broader asset allocation literature; Asset Allocation and Private Markets fills the gap, with comprehensive information and practical guidance. Cover Title Page Copyright Contents Foreword Acknowledgments About the Authors Data Sources Abbreviations and Acronyms Chapter 1 Sources of Capital: Nature, Constraints, and Objectives 1.1 Behavioral Biases and Their Consequences 1.1.1 Behavioral Biases in the Context of Private Markets Investing 1.1.2 Avoiding Behavioral Biases 1.2 Laying the Ground for an Asset Allocation: Analyzing Investors 1.2.1 A Multi‐Dimensional Analysis 1.2.2 Categorizing Investors 1.3 Summary Chapter 2 Asset Allocation: Models, Limits, and Adaptations 2.1 Are Private Markets an Asset Class? 2.1.1 The Asset Class of Private Markets 2.1.2 Factors and Private Equity 2.1.3 The Challenge of Building a Unified Asset Allocation 2.2 Frictions between Asset Allocation and Private Markets 2.2.1 Managing Structural Under‐Allocations to Private Markets 2.2.2 Limited Rebalancing Options: the Case for Allocation Brackets 2.2.3 A Possible Proxy to Define Target Allocations: Open‐Ended Funds 2.2.4 Alternative Approaches 2.3 Setting Up Private Markets Allocation Thresholds 2.3.1 Defining the Lower Band for a Private Markets Allocation 2.3.2 Defining the Higher Band for a Private Markets Allocation 2.3.3 Getting Started with a Private Markets Allocation 2.4 Summary Chapter 3 Private Markets Investing1 3.1 Active Investment Strategies Call for Delegation and Intermediation 3.1.1 Investment Instruments 3.1.2 Intermediation and Delegation: Funds 3.1.3 Further Intermediation: Funds‐of‐Funds, Mandates, and Securitization 3.2 Benefits and Challenges of Private Markets Investing 3.2.1 Benefits: Performance and Diversification 3.2.2 Challenges 3.2.3 The Benefits and Challenges of Intermediated Private Market Investing 3.3 Strategies: Private Equity, Private Debt, and Private Real Assets 3.3.1 Private Equity: Financing Private Companies 3.3.2 Private Debt: Senior/Direct/Unitranche, Mezzanine/Subordinated and Distressed Debt 3.3.3 Private Real Assets: Private Real Estate, Private Infrastructure, Timber/Farmland, Energy Assets and Other Niches Conclusion: Blurry Borders Summary Chapter 4 The Three Dimensions of Investment 4.1 Setting Up an Investment Horizon 4.1.1 Differentiating the Investment Horizon and the Payout Schedule 4.1.2 Theoretical and Actual Investment Horizons 4.1.3 Payout and Distribution Patterns 4.1.4 The Secondary Market 4.1.5 Structured Financing and Other Liquidity Instruments 4.2 Setting Up the Risk Thresholds 4.2.1 Diversification and Correlations: Private Markets and the Rest of the Universe 4.2.2 Risks Associated with Direct Funds and Funds of Funds/Mandates 4.2.3 Myths: “De‐Smoothing” LBO Returns and LBO as a Leveraged Listed Index 4.2.4 Dealing with Foreign Exchange Fluctuations 4.3 Setting Up Return Expectations 4.3.1 The Limits of Performance Data 4.3.2 Performance Dispersion 4.3.3 Persistence of Performance 4.3.4 Analyzing Performance to Set Targets 4.4 Addressing Private Market Specificities 4.4.1 Facing Opportunity Costs 4.4.2 Underachieving Deployment Targets 4.4.3 Dealing with Equity Bridge Financing Facilities Summary Chapter 5 Portfolio Construction and Management 5.1 Building Portfolios of Private Markets Funds 5.1.1 The Top‐Down Perspective 5.1.2 First Rule: Do Not Try to Time the Market 5.1.3 A “Market Neutral” Top‐Down Matrix 5.1.4 The Use of Secondary Investments 5.1.5 The Bottom‐Up Perspective 5.1.6 Second Rule: Diversify 5.1.7 The Use of Overcommitment 5.1.8 Modeling: Setting Up of a Market‐Neutral' Investment Program 5.1.9 Setting Up and Assessing a Defensive Portfolio 5.1.10 Setting Up and Assessing an Aggressive Portfolio 5.2 Controlling and Adjusting 5.2.1 Selecting Fund Managers: Intrinsic, Comparative, and Extended Analyses 5.2.2 Operationally Manage the Commitments to Funds 5.2.3 Adjust Their Programs If and When Needed 5.3 Portfolio Construction: The Convergence of Top‐Down and Bottom‐Up Approaches 5.3.1 Preliminary Questions 5.3.2 What Tickles Fund Investors? 5.3.3 Setting Up a Program in Practice 5.3.4 What Is the Right Number of Fund Manager Relationships? 5.3.5 Will Private Equity Deliver Lower Returns Going Forward? Summary General Conclusion Glossary Bibliography Index EULA **The comprehensive guide to private market asset allocation** __Asset Allocation and Private Markets__ provides institutional investors, such as pension funds, insurance groups and family offices, with a single-volume authoritative resource on including private markets in strategic asset allocation. Written by four academic and practitioner specialists, this book provides the background knowledge investors need, coupled with practical advice from experts in the field. The discussion focuses on private equity, private debt and private real assets, and their correlation with other asset classes to establish optimized investment portfolios. Armed with the grounded and critical perspectives provided in this book, investors can tailor their portfolio and effectively allocate assets to traditional and private markets in their best interest. In-depth discussion of return, risks, liquidity and other factors of asset allocation takes a more practical turn with guidance on allocation construction and capital deployment, the “endowment model,” and hedging ― or lack thereof. Unique in the depth and breadth of information on this increasingly attractive asset class, this book is an invaluable resource for investors seeking new strategies. * Discover alternative solutions to traditional asset allocation strategies * Consider attractive returns of private markets * Delve into private equity, private debt and private real assets Private markets represent a substantial proportion of global wealth. Amidst disappointing returns from stocks and bonds, investors are increasingly looking to revitalise traditional asset allocation strategies by weighting private market structures more heavily in their portfolios. Pension fund and other long-term asset managers need deeper information than is typically provided in tangential reference in broader asset allocation literature; __Asset Allocation and Private Markets__ fills the gap, with comprehensive information and practical guidance. "The book seeks to address the need for institutional investors to address failing asset allocation strategies by allocating a larger proportion of assets to private market structures. As returns from bonds and stocks have been disappointing and the stock market volatile private assets are of increasing interest to pension managers and other large asset allocators. The book will focus on private equity, private debt and private real assets and will cover debates about correlation with other asset classes, returns, risks, the "endowment model", construction and deployment of an allocation, hedging (or the lack thereof) and illiquidity. All of this information is useful to large asset managers, pension funds in particular, that struggle to find a single authoritative source that deals with this type of asset"-- Provided by publisher