The same political sources of volatility are impacting public and private markets, but could features of the private space help clients stay invested?
For a little over two years, private markets have underperformed public equities. This is a relatively rare thing in investing history and one that Mike Woollatt explains was driven by the significant rise in the so-called magnificent seven and other large-cap US equities. Woollatt, the Managing Director and Head of Americas Client Solutions at Hamilton Lane, notes that since President Donald Trump took office and began his tariff threats against key trade partners a level of uncertainty has been introduced into the global economy that public markets don’t react well to. While privates are subject to the same uncertainty, he explains that the nature of their behaviour can help investors get a smoother ride.
“The public markets are reacting now in very large swings, up and down, and it's no surprise that you're not really seeing that on the private side. It’s not a bug, but a feature of the private markets that they have significantly lower volatility and inherent downside protection,” Woollatt says.
Woollatt outlined why he thinks a combination of Trump tariff threats and a public market slightly “out over its skis” has produced this volatility. He outlined where he sees opportunity in privates now and explained why privates have been more insulated in their price movements than public markets despite being subject to the same uncertainty.
Much of that insulation comes down to the fact that private assets are priced periodically and are not traded intra-day like public securities. Peaks and troughs that a public security might show can be smoothed out by the lack of pricing that occurs over certain intervals. However, Woollatt also notes that the nature of private asset valuations differs from public. In the case of private equity, for example, a company is priced at what it could be sold for in the future, which is not exactly how public equities are priced.
Just as private equity pricing can smooth out volatility, Woollatt argues that private equity management incentivizes longer-term thinking. Leaders are less focused on quarterly growth and have more of a mandate to focus on a longer time horizon.
While private equity is one area that Wooollatt believes can provide ballast right now, he notes that the majority of the emerging PE market is in the United States. Given some of the currency issues currently ongoing and the volatility we now see in the Canadian dollar, he recommends looking at hedged funds for these assets. Outlining portfolio construction first principles Woollatt notes that it could arguably be more important to hedge on infrastructure and private credit strategies, too, and ensure currency risk doesn’t reshape returns for these funds.
While private assets might come with some volatility protection, Woollatt notes that they are still facing headwinds due to uncertain US trade policy. The pall of uncertainty and the prospect of significant trade tariffs all point to a probability of returns declining in the immediate term. Woollatt takes heart, though, by looking at the history of private asset performance. He notes that privates have tended to outperform publics during periods of downturn. He notes, as well, that massive companies with global supply chains may suffer more in this environment, while smaller more nimble companies tend to pivot more quickly. Private markets, he notes, tend to have a larger proportion of smaller names.
Those advisors who predict a recession and are currently seeking safe harbour might want to look more at infrastructure in addition to those small-medium sized private companies. Infrastructure, Woollatt notes, tends to perform well in recessionary environments. Toll road demand isn’t as negatively impacted by a downturn as other more elastic goods.
While Woollatt sees assets now flowing into US smaller-cap private equity, he notes that the instability prompted by the Trump administration may see more capital rotating to other global markets in the longer-term. European and Asian private assets may start to look more attractive over longer stretches should uncertainty persist in North America.
As advisors look at some of these trends and try to use them to protect clients, Woollatt argues for a clear communication style rooted in data and history. He believes that the case for privates can be made with a simple and straightforward understanding of their dynamics and how those dynamics can help clients manage the storms of the present market.
“Data doesn't oversell, data is data. If you look back over now almost 30 years, you can see an outperformance and a lower volatility in the privates versus publics,” Woollatt says. “I don't talk about the future as much as what's happened… I think the best thing is to lean on facts and learn history.”
