The risk in the rise of private investments GlobeInvestor
from their chosen bond substitutes. But increasingly, investors are also responding to low yields by stepping further out on the risk spectrum by allocating slices of their portfolios to private-market investments. These products hold a lot of allure – i.e. attractive returns; higher yields and uncorrelated returns.
The more complex an investment’s strategy or structure, the less likely you are to fully grasp it, and the more likely you are to make an error in judgement. The business of private lending is simple at a high level, but, when putting lending funds through our due-diligence process, we encounter a range of complexities.
Other times, governance worries are more subtle. Some of these private-investment funds started as a single individual’s business activities. Often such enterprising and smart investors are asked to invest for others. And when they “roll” their personal investments into a fund structure that takes in capital from others, the founders still sometimes treat the fund as their own personal business. This is tougher to detect but requires as much diligence as more obvious governance shortcomings.
Nowhere was it obvious that this product’s fee structure would create “friction” of 6 per cent a year. This was only clear after completing this analysis; and that was enough for us to conclude that we had no interest.
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