Risk disclosure to private markets
Private equity is the better-known term than private markets. Private markets stands for all forms of private market investments. In addition to private equity (shares), this also includes private debt (bonds), private real estate (property), private infrastructure (infrastructure) and others.
Compared to financial products that are publicly traded on a stock exchange, private market investments entail increased risks.
1. Skills of the fund manager
When it comes to investing indirectly in the private market, such as through a private equity fund, the abilities of the fund manager play a critical role. It cannot be guaranteed that the manager of a private equity fund will be capable of securing appropriate investments and producing returns that align with the expectations of this particular form of investment.
2. Less regulation and a lack of transparency
Private market investments can be an attractive option for investors looking for higher returns. However, it’s important to understand that these investments are subject to less regulatory oversight, which can result in a lack of transparency. As a potential investor, it’s essential to consider the potential risks involved and do your due diligence to ensure that you are making an informed decision. By carefully assessing the quality of the investments beforehand, you can help mitigate these risks and make the most of your investment.
3. Difficult valuation of investments
It can be a tricky business to value private market investments. Unlike publicly traded investments, which have a readily available market value, the valuation of private market investments requires a deep understanding of multiple factors, making it a complex process. On top of that, there is a conflict of interest between reporting the best performance to attract more income and investments, versus the accurate valuation that can have the opposite effect. Fortunately, the providers of private market investments have the ability to temporarily restrict the sale of shares, thus avoiding a downward spiral. This is a reassuring step in the right direction, as it helps minimize the conflict of interest and ensures a more accurate valuation of private market investments.
4. Higher market risks
Like any other form of investment, private market investments also carry a risk of loss. The performance of private market investments is influenced by different factors, such as the economic environment, sector trends, and overall market sentiment. Typically, investments are made in future prospects, and there is a level of uncertainty involved. However, to minimize risk, investments in private markets are diversified across different companies and projects.
5. Higher individual risks
Companies that are eligible for private market investments may have higher debt levels and be more vulnerable to negative market movements, such as rising interest rates, than established companies. Additionally, private companies are at a higher risk of becoming insolvent and going bankrupt than publicly listed companies.
6. Low to no saleability
Private market investments have low liquidity. As the shares are not traded on public stock exchanges, it can be difficult or even impossible to sell them. This can be particularly problematic in the event of short-term liquidity requirements.
7. Partial withholding of funds until receipt of the audited annual report
Private market investments can be challenging to value, which may lead to adjustments in the net asset value after the audited annual report has been prepared. As a result, funds may hold back a portion of the investor’s fund units if the investor has decided to redeem all of their units. For instance, 90% of the units will be paid out on the redemption date, while the remaining 10% will be retained for a specific period until the next audited annual report is received. Here’s an example: If the fund’s financial year ends in December, and the investor has indicated that they intend to redeem 100% of their units in March, only 90% of the redemption proceeds may be paid out at that time. The remaining 10% will not be paid out until April of the following year (i.e. 13 months later). This allows the fund enough time to evaluate the audited annual report after the balance sheet date in December.
8. Further information
Please consult the brochure Risks Involved in Trading Financial Instruments published by the Swiss Bankers Association (SBA) for further information on investment risks: https://www.swissbanking.ch/_Resources/Persistent/e/1/8/d/e18dc86d8033b556db0c7db772e9b025042db1d5/SBA_Risks_Involved_in_Trading_Financial_Instruments_2023_EN.pdf