The Curi Capital team believes that private investments can be a key piece of the portfolio for investors who are interested and able to access them. While there are many different types of private investments, we break up the space into three broad categories: private credit (i.e., direct lending to private companies), private real assets (i.e., real estate and farmland), and private equity (i.e., venture capital and buyout funds). Here are three reasons why we like private investments:
Private investments can be a good source of diversification, which may be the one true “free lunch” in investing. With a diversified portfolio, investors can lower their risk without sacrificing returns by combining investments that have the same expected return but are not correlated to one another. Many assets, such as global bonds and stocks, tend to be highly correlated in times of heightened market volatility, which can reduce the benefits of diversification when investors need it the most. In addition, those assets only make up a portion of the investable universe. However, private investments offer investors a greater number of investments that are not highly correlated to one another, making them a good option for a diversified portfolio. For example, the price of farmland is less volatile than stocks and bonds and tends to be influenced by different factors such as crop prices, weather, and food demand.
The second reason to consider private investments is their ability to increase expected returns through the use of leverage. Many private investment strategies are able to take advantage of low borrowing rates and greater borrowing capacity than registered vehicles like mutual funds and exchange-traded funds (ETFs) to increase investment returns. Here’s a hypothetical example to demonstrate the power of leverage (assuming $0 taxes, $0 fees, and $0 transaction costs):
Hypothetical unlevered investment
Hypothetical levered investment
While investors need to be cautious when using leverage, as it can magnify returns for better or worse, this access to the power of leverage is one of the reasons we recommend considering private investments.
Finally, we believe private investments are important now because we expect more muted returns for many asset classes over the next five to seven years. For example, the U.S. Treasury 10-year bond yield is 1.75% as of 3/31/2021, so bond investors should set expectations for low single-digit returns moving forward. In addition, many stocks currently have elevated price-to-earnings (PE) values, indicating that they are richly valued. (According to J.P. Morgan, since 1995, five-year forward returns are negative when the S&P 500 Index PE is at or higher than current levels.) While Curi Capital does not expect annual U.S. equity returns to be negative over the next five years, we do expect returns that are significantly below historical averages. Private investments increase the probability of finding investments with higher returns than traditional stocks and bonds.
Diversification, leverage, and current market valuations are why we believe private investments can be a key piece of the portfolio. Our goal at Curi Capital is to provide access to private investments for those investors who are interested and able to access them. If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of the Curi Capital team at 984-202-2800.
Diversification does not guarantee a profit or protect against a loss in declining markets. Leverage may offer the potential for higher returns, but it also exposes investors to increased risks. An index is unmanaged and is not available for direct investment. This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Past Performance is no guarantee of future results. Data is from sources believed to be correct, but no guarantee can be made to their accuracy. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.