Forum: Higher returns from private markets not a sure thing
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Having spent over 20 years investing in alternative assets for large institutional investors, I would like to highlight several crucial points that were not mentioned in the article “Private markets may open doors to Singapore retail investors” (April 26).
Unlike public market funds – commonly known as unit trusts in Singapore – which tend to track benchmarks closely, private market fund returns vary significantly. For instance, 2007 vintage private equity funds delivered internal rate of returns (IRR) of between 20 per cent (top quartile) and 0 per cent (meaning investors would have lost money after fees).
This underscores the importance of fund selection. Unfortunately, top-performing funds are often oversubscribed and rarely accessible to individual investors through banks or fintech platforms.
Additionally, distributors typically prioritise funds that offer higher fee rebates, which are not necessarily top-quartile funds. As a result, retail investors may gain access to only median-return funds (with IRR of 10 per cent) at best.
A commonly cited advantage of alternative funds over public market funds is their lower volatility, despite having similar underlying assets such as equities.
However, this stability is largely an accounting illusion.
Valuations of private funds are updated quarterly, not daily. Fund managers have discretion over valuation methods, further smoothing out fluctuations.
The Straits Times article highlights the potential for outsized returns from investing in private companies, giving the example of early investments in Apple. This potential has led many high-net-worth individuals to invest directly in early-stage companies through friends, bankers or fintech platforms, hoping to strike a home run. However, the odds of success are low.
Individual investors face negative selection bias, as the best deals are typically oversubscribed by top venture capital funds and institutional investors, leaving retail investors with riskier or overpriced opportunities.
Private funds charge higher fees than public funds. If investing through a fund of funds, there is an additional layer of fees. A third layer applies when investing via aggregation platforms such as banks or fintech platforms.
When evaluating an investment, always identify all fee layers and calculate net returns. Distributors may present fund-level returns without deducting these fees. If private funds become available to retail investors, I hope the Monetary Authority of Singapore mandates clear disclosure of net returns in the offering documents.
Yeo Chee Kean
