Towers Watson has urged investors to think about investing in the private market after research revealed an allocation to private markets could achieve better risk-adjusted returns than traditional portfolios.
Ross Barry, senior investment consultant and head of portfolio construction for Towers Watson in Australia, said the reason many investors had sub-optimal allocations to the private market was due to the market's complexity.
He said a holistic approach differentiating alpha and beta strategies could position illiquid private market portfolios for long-term success.
Global head of investment research at Towers Watson Craig Baker said the holistic approach allowed for more robust portfolio construction and provided investors with a better platform to select top opportunities across private assets and improve the portfolio's risk profile.
"Fees and fund structures can be negotiated in the context of an attractive net-of-fees value proposition which is better aligned to investors' needs," he said.
Towers Watson put forward a number of reasons why investors should allocate to the private market, including exposure to unique market segments, additional diversification and low-correlation benefits, access to a diverse range of value-creation tools and high returns.
The research introduces Towers Watson's concept of Adaptive Portfolio Management, which pursues a more thematic and flexible method of constructing a private markets' portfolio with a medium-term outlook for sectors and regions.
Barry said that while benchmarking the performance of private markets' investments was challenging, it was extremely important.
He said Towers Watson approached fees in private markets by disaggregating total returns from the effects of beta, leverage and management fees/carry by establishing a framework for a 'net alpha' and then applying an appropriate benchmark.
