The art and science of investing lies in connecting capital with opportunities. Wealth creation operates like a two-sided marketplace, where having both capital to invest and assets to invest in, is key to success.
In a world where liquidity has been boosted by accommodative central bank policies, attracting capital to the right opportunities isn’t the more challenging side of that marketplace. The real challenge is in finding opportunities that offer appealing risk-reward dynamics.
Public markets are shrinking
So, where does one look? The listed market isn’t providing much in the way of new ideas, especially once you look beyond the technology sector in the United States. There’s a reason why the Magnificent 7 seem to hog the headlines – in a stock exchange with a shrinking number of listed counters, that’s where most of the activity in public markets has been.
For example, the London market saw fewer than 20 Initial Public Offerings (IPOs) in 2024, the lowest number in well over a decade. Although South Africans are used to reading about delistings on the Johannesburg Stock Exchange (JSE), few realise that the London Stock Exchange (LSE) is facing the same problem, if not worse. This is a market that used to welcome roughly 60 new listings a year from 2015 to the start of the pandemic. In 2024, 88 companies either delisted or transferred their primary listing from the main market. Although the pandemic period saw a flurry of new listings as interest rates plummeted, the story since then has clearly been depressing for London bankers who are operating in a city that has lost its shine as a hub for capital raising activity. Brexit, regulations and other issues have all contributed.
For investors who appreciate the legal system and familiar language offered by the UK, this presents a conundrum in terms of how to access the opportunities in that market. Liquidity is a pressure point on the LSE and this has a direct negative impact on valuations. The flywheel effect is clear: lower valuations attract fewer new listings, which in turn leads to a further decrease in liquidity.
Looking beyond public markets
Importantly, this doesn’t mean that opportunities don’t exist. It just means that many of them are to be found outside of public markets. Accessing such opportunities requires specialist skillsets and deep relationships built over a long period.
Private equity has been a feature of the landscape for as long as anyone can remember and there’s no sign of that changing. As IPOs become an increasingly less appealing way to raise capital or crystallise value for founders, many companies are now choosing to negotiate directly with sophisticated investors in the hope of achieving a more efficient outcome (private markets are less regulated) and in many cases a better valuation.
Beyond private equity, there’s an appealing growth story elsewhere on the capital stack. For companies seeking other forms of capital, private debt and hybrid capital markets have become appealing. Growth in private debt was triggered by the Global Financial Crisis (GFC), which saw banks pull back significantly as regulators clamped down on their activities in the hope of preventing another such crisis from happening. This made it more difficult for banks to operate in certain spaces that offer attractive risk-reward dynamics. Private debt is one such space, with a clearly positive trajectory since the GFC.
Why private debt appeals to investors and borrowers
Today, private debt is a $1.6tn asset class that represents 12% of the overall alternatives market. It is no longer a sub-category of private equity, but rather a powerful standalone asset class that offers benefits to both investors and borrowers alike.
For investors, private debt is a yield-enhancing asset class that offers attractive absolute value returns alongside a capital preservation focus. Diversification is key here, with low correlation to traditional markets and reduced volatility. For borrowers, the potential debt structures are far more flexible than would typically be available from traditional banks. At deal sizes where banks have no choice but to offer cookie-cutter solutions, experienced private debt and hybrid capital professionals can offer bespoke structures that are attuned to the objectives and cashflow profiles of the borrowers.
This has not escaped the attention of major institutional investment houses, many of whom are now making meaningful allocations to alternative assets of up to 30% of a portfolio. The traditional 60/40 split of equities and bonds is no longer appropriate in the modern world, with increasing correlation in performance and thus lower diversification benefits. This approach is even more appropriate in a higher-for-longer interest rate environment, as private debt funds tend to achieve positive real yields, i.e. yields in excess of inflation.
Simplifying alternative investments
Westbrooke Alternative Asset Management is focused on addressing the hurdles that South African capital allocators face when dealing with alternative investments. These range from accessibility of platforms through to complexity and frequency of pricing and reporting. With deep experience operating in this space, Westbrooke manages R13bn of shareholder and investor capital across South Africa, the United Kingdom and the United States of America.
For example, The Westbrooke Yield Plus UK private debt fund earns risk-adjusted cash returns between 7% and 9% per annum in GBP. As part of a wider, diversified portfolio, this is a helpful source of inflation-beating returns with low correlation to the other assets typically found in portfolios. The post-tax return is also enhanced through the fund-generating income in a more tax-efficient manner.
In offshore portfolio strategies that are typically bloated with technology companies in the United States that are highly correlated as a sector, an allocation to alternatives can provide both yield and diversification benefits. Westbrooke makes it easier than ever before to make such allocations, which becomes even more important in the current geopolitical environment that is driving heightened volatility and risk in public markets.
