Beyond Returns: What Private-Market Investors Can Learn from Institutional Portfolios

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Welcome to Unlocking Liquidity, the podcast from PrimaryMarkets exploring the ideas shaping private markets.

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An exciting business, an innovative technology or the prospect of a future IPO can make an investment compelling. But how does that opportunity fit into the rest of your portfolio?

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In this episode, we explore what private-market investors can learn from institutional portfolio construction. Taking systematic investing as our starting point, we examine why every investment needs a clear purpose—and why owning several different companies does not necessarily mean your risks are diversified.

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We also look at valuations, the implications of longer holding periods and the role secondary trading can play in providing potential exit pathways.

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Join us as we go beyond expected returns to consider the bigger picture: how individual investments work together.

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An attractive investment opportunity can be compelling on its own. A growing business, an innovative technology or access to a company before it lists may all provide reasons to take a closer look.

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But there is another question worth asking before committing capital: what role will this investment play in the wider portfolio?

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That question sits at the heart of a portfolio approach used by major institutional investors. Australia's Future Fund, for example, explicitly focuses on outcomes across its total portfolio. The emphasis is on how investments work together, rather than assessing each holding in isolation.

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For private-market investors, this offers a useful perspective. The appeal of an individual opportunity matters, but so do its contribution to overall risk, its funding requirements and the time it may take to realise a return.

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Systematic strategies use defined rules and quantitative models to guide investment decisions. They can pursue different objectives, from capturing trends to accessing sources of return associated with characteristics such as value or momentum. AQR's research on alternative risk premia illustrates how several such approaches can be combined across liquid markets.

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The relevant lesson for private-market investors is the discipline of assigning an investment a purpose.

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An allocation intended to generate long-term growth should be assessed differently from one intended to provide regular income or ready access to cash. Calling both investments “alternatives” tells an investor little about how either will behave when conditions change.

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Unlisted company shares and quantitative strategies can have very different risks and liquidity characteristics. A portfolio benefits from making those differences explicit.

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Private-market opportunities span businesses at different stages of development, with different funding needs and routes to generating value.

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An early-stage technology company may depend on product development, customer adoption and further capital raising. An established private business may be assessed more heavily on earnings, cash generation and its ability to expand profitably.

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For investors, a useful starting point is to identify what must happen for the investment to succeed. Is the expected return dependent on revenue growth, improved margins, dividends, an acquisition or a future listing?

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A potential IPO deserves particular scrutiny. It is one possible outcome, with timing and valuation dependent on both business performance and market conditions. An investment case should also consider what happens if the company remains private for longer than expected.

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Owning several companies does not automatically create a well-diversified portfolio.

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Consider an investor holding a software business, a consumer platform and a medical technology developer. Their products differ, but all three might need fresh funding within the next year. A difficult capital-raising environment could affect them simultaneously.

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This hypothetical example illustrates why diversification requires looking beneath company names and sector labels. Shared dependencies may include access to funding, interest rates, customer spending or a small number of major contracts.

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The question is whether a new investment adds a different source of opportunity or increases exposure to risks already present. Diversification can reduce concentration risk, but it cannot eliminate investment losses.

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Liquidity affects both the ability to meet financial commitments and the flexibility to respond to new opportunities. ASIC's Moneysmart identifies liquidity risk as the possibility that an investor cannot sell and access their money when needed without affecting the market price.

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For an unlisted investment, the assessment should include the likely holding period, transfer restrictions and available sale mechanisms. Where a fund involves capital calls, investors also need to account for commitments that have not yet been drawn.

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A useful question is: if this investment takes several years longer than expected to realise, can the rest of the portfolio accommodate that delay?

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That shifts the discussion from willingness to hold an asset to the financial capacity to keep holding it.

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A valuation is another important part of the picture. Investors should understand when it was prepared, what evidence supports it and whether circumstances have changed since then.

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APRA's review of superannuation practices highlights the importance of governing unlisted asset valuations and considering when valuations need updating outside the regular cycle.

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For someone assessing a private company, practical questions include whether the reference price comes from a recent funding round, an independent valuation or another method. If it comes from a funding round, were the securities issued on the same terms as those now available?

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A stated valuation and the price a buyer will pay for a particular shareholding may differ. Understanding that distinction helps investors assess both entry pricing and potential exit expectations.

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Secondary trading provides a mechanism through which existing shareholders can seek buyers for their holdings. It can offer a potential route to an exit without waiting for an IPO or a sale of the whole company.

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PrimaryMarkets connects eligible investors with unlisted opportunities and provides Trading Hubs that support structured secondary trading.

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For investors applying a portfolio perspective, access to such mechanisms is relevant when assessing future flexibility. However, a trading facility does not guarantee a buyer, an acceptable price or a sale within a particular timeframe. Company rules, investor eligibility and demand still matter.

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The most useful institutional lesson is a habit of asking how each decision affects the whole portfolio.

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Before adding a private-market investment, investors can consider its intended role, the risks it shares with existing holdings, the basis of its valuation and the consequences of a longer holding period.

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This gives due diligence a broader purpose. Alongside assessing whether a company has potential, it helps establish whether the opportunity fits the investor's objectives and capacity to commit capital over time.

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As private markets continue to evolve, investors and companies are increasingly seeking greater access, transparency and liquidity. PrimaryMarkets is an Australian-based platform that helps facilitate capital raising and secondary trading opportunities in private companies, managed funds and other unlisted investments.

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Through its capital raising and trading solutions, PrimaryMarkets connects sophisticated and wholesale investors with a diverse range of private market opportunities across sectors including technology, healthcare, energy, resources, property and alternative assets. The platform also assists companies and fund managers to access growth capital while providing existing shareholders and unitholders with potential liquidity pathways.

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By combining technology with market expertise, PrimaryMarkets is helping to modernise private capital markets, making it easier for investors to discover opportunities and for companies to connect with capital. As the private market ecosystem continues to mature, platforms such as PrimaryMarkets are playing an increasingly important role in improving access, facilitating transactions and supporting the efficient flow of capital.

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And that brings us to the end of this episode of Unlocking Liquidity. Thanks for spending your time with us, we hope today’s conversation gave you a fresh perspective on private markets and how liquidity is evolving. If you enjoyed the episode, please follow or subscribe wherever you listen, and feel free to share it with someone who’d get value from it. For more insights, opportunities and episodes, visit PrimaryMarkets.com. Until next time, thanks for listening, and we’ll see you in the next conversation.