Why expanded private market investment options can be a ‘double-edged’ sword

“Choice is always really good,” Charlie Viola, executive chairman of Viola Private Wealth, said on the most recent episode of The ifa Show, but that doesn’t mean the expansion of investment options doesn’t come with dangers.

“There’s only so many CBA and BHP shares that you want to own,” Viola said.

“As a result, we wanted to make sure that we were giving clients access to different types of investments, generating their returns in different ways and making sure we were generating revenue for clients especially through the cycle.”

In the past, options within the private market were limited and, according to Viola, often carried an association with the “exotic”. However, as the market has grown, so too have the opportunities.

“The private market is [now] huge and there is so much opportunity in that space,” he said, highlighting how his practice took advantage of this growth.

“What needed to happen [was we get] those really good managers in those private markets be able to bring to these wholesale and mezzanine-style clients an opportunity to invest in those spaces.”

With growth in private market, the choices for clients also grow, including for clients outside the ultra-wealthy bracket. However, Viola highlighted that too much choice can become distracting.

“Choice is always a double-edged sword. We work really of the due diligence process that we go through around manager selection, fund selection.”

He added: “There is obviously a danger that as you get more and more of this stuff come to market, you’ve got people not making the right decisions.”

Like all financial advice, directing clients into private market investments requires the right due diligence and to stick to popular wisdom.

“The danger is that with lots of choice, there will always be ones that don’t perform as well,” Viola added.

“So, the due diligence process that we or anybody else like us go through becomes really important because ultimately, you’re backing the jockey. The manager selection becomes super important and therefore the due diligence process also becomes really important.

“The normal kind of investment management theory is that asset allocation accounts for something like 85 to 90 per cent of total investment return. We’re a big believer in not exposing all the clients’ funds to one type of risk.”

As Viola highlighted, diversity is “risk mitigation 101”, and history has proven time and time again that the “all your eggs in one basket” approach, while capable of high rewards, carries much higher risk.

“The greater your exposure to one type of asset and one type of return and one type of thing that drives that return, the greater the risk you’re taking. If you’re taking that much risk, are you being rewarded and can you handle the downturn if it occurs?” Viola said.

“All we say to investors is that we can do that, we can keep buying CBA and BHP shares or we can continue to just invest in the Mag Seven, but what we’re doing is we’re over apexing the risk that you’re taking for the possible outcome.

“What we would much rather do is generate a return that may well be 200 or 300 basis points below what that return might be over the short term to generate a return that is slightly lower, but we’re taking significantly less risk to do it.”