accessing private markets 1.2 Understanding public-private solutions

This video introduces a special category of product: public-private solutions. A public-private solution combines public and private market investments into a single fund, which comes with a number of benefits. Learn about the advantages, considerations and how to discuss them with your clients. 

Bryan Favilla

Director of fixed income markets at Capital Group

4MINVIDEO

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Bryan Favilla, Director of fixed income markets at Capital Group

 

How can you help individual investors access the potential benefits of private markets? Simple: public-private solutions.

 

Public-private solutions are designed to offer a lower risk, higher reward entry into private markets.

 

By combining public and private investments, they make private markets more accessible and can unlock opportunities that were previously only available to a select few.   

 

So how are public-private solutions designed to mitigate some of the risks that arise from investing in private markets?

We’ll talk about that, as well as ways these solutions make private investments more accessible and ways you can discuss them with your clients. 

 

From higher potential return to broader portfolio diversification, public-private solutions seek to offer a wealth of potential opportunity for long-term investors who are comfortable with less liquidity in their portfolio. 

 

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Let’s take a closer look at some of their advantages, starting with access. 

 

Historically, private markets have typically only been accessible to institutions and the largest individual investors. 

 

Significant capital requirements and the complexity associated with making these investments shut the average individual investor out. 

 

Public-private solutions change that. They require less initial capital and aim to simplify the overall investment process. 

 

Lower minimums and straightforward fees can open the field for more potential investors.

 

And taxes are reported with a simple 1099 filing.

 

Traditionally, investments in private assets usually involve complicated terms, high fees, pages of paperwork and limited liquidity options. And since private assets aren’t as actively traded, it can be hard to properly evaluate their price and the true value of the investment. 

 

Since originators of the fund manage the details, it’s always important to invest with reputable institutions with long track records of success.  

 

When private investments are originated and vetted by a well-resourced, experienced manager, that may help mitigate some of the risks.

 

Because valuations of private assets change less frequently, investors may forget there is always risk of loss. Also, private markets expose investors to different risks not necessarily less risk.

 

Remember, private asset investing is not intended to lead to fast gains. Private assets aren’t traded daily on an exchange like public assets; they're meant to be held for the long term and there are fewer opportunities to exit an investment. This can cause concern about liquidity.

 

When talking to your clients, try to focus on these key points. Public-private solutions: 

 

Open access to exclusive private markets. They benefit from the research and management of private assets through fund originators. They’re simpler in terms of taxes and fees than other means of private investment. And, by blending public and private investments together, they seek to increase overall liquidity.

 

We hope the appeal of public-private solutions is clear. The private market is full of potential opportunities and by blending private investments with public investments, opportunities are open to more of your investors. 

 

As a next step, you might want to start thinking about how to use public-private solutions to potentially generate more value for more of your clients.  

 

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Deepen your understanding

Select each resource below to learn more.

Public-Private+ Funds from Capital Group and KKR offer a combination of publicly traded securities and private market investments packaged in interval funds to help unlock access to private markets for your clients in a thoughtful, blended approach.

 

Private markets provide investors with opportunities to pursue outcomes above what may be achieved in publicly traded securities. So why are Capital Group and KKR blending public and private investments together in an interval fund, rather than offering just a private credit fund?

 

Opportunity

 

  • Pursue potentially higher returns from diverse asset classes.
  • A holistic view on investor portfolio construction with blended public and private investment opportunities.

 

Access

 

  • A vehicle — an interval fund — that can help address challenges of investing in opportunities with limited or no secondary market liquidity.
  • Blending liquid public securities and private market investments provides support for the current expectation of 10% quarterly share repurchases.
  • Potentially more liquidity than traditional private market investments.

 

Implementation

 

  • Simplified tax reporting with IRS-1099 forms (DIV and B).
  • Compelling fee structure.
  • Ease of one fund with multiple potential sources of returns.
  • Ongoing due diligence. 
  • Taps into established risk management processes and capabilities.

 

Be sure to consider the risks

 

  • These funds increase investor exposure to liquidity risk.  
  • A lack of liquidity can lead to complex valuations, limiting some real-time pricing transparency for individual investments.  
  • Investing in this vehicle may involve less liquidity compared to traditional mutual funds, ETFs or individual public securities — which can be sold at any time — with which your clients may be more familiar.

Discover how private markets are transforming the financial landscape and why they’re gaining momentum now. By watching this video, you’ll explore Capital Group’s innovative approach to unlocking private market potential for your clients, offering diversification, the potential for higher yields and long-term growth opportunities.

Holly Framsted

Head of global product strategy and development at Capital Group

Wesley Phoa

Solutions portfolio manager at Capital Group

John Queen

Fixed Income Portfolio Manager

6MINVIDEO

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Holly Framsted, Head of product group at Capital Group

 

Holly: Welcome. Today I am joined by two of our most senior investment professionals, Wesley Phoa, who is one of our solutions principal investment officers, and John Queen, who is a fixed income principal investment officer. Today we're going to be discussing private markets assets and why now might be an appropriate time to consider including them in your clients' portfolios.

 

Wesley, let's start with you. Why is now the time to think about private markets investing in private credit in particular?

 

Wesley Phoa, Solutions portfolio manager at Capital Group

 

Wesley: Well Holly, it comes down to what investing is actually about.

 

So, companies produce things, they do things to add value, they move the economy forward, but they need capital to do that, and investors reap the rewards of providing capital to them in the form that they need it. Companies always needed to borrow as well as raising equity. And in the old days, they used to borrow from the banks. As the economy grew, companies need for debt capital expanded beyond what banks would naturally provide. And so alongside that, you got corporate bond markets appearing 50 years ago. That was all investment-grade bonds. But then think about what happened in the '80s. You had a slew of new companies accessing bond markets through high-yield bonds. That was a turbulent time in markets, but that high-yield bond market, new as it was then, was meeting a real need. And we identified that that was going to be a durable asset class.

 

Why is that? It's because companies now need capital in that form. Because of what's happening in the banking sector, because of companies increasing need to stay private for longer because of their need for flexibility and speed in raising debt capital, we think that this is a durable part of the overall landscape of capital markets. And now is the time to make it available to that broad pool of investors that we serve.

 

Holly: I love that analogy to high yield in the '80s and the fact that we are now really talking about a new sector in fixed income in many ways, relative to a new asset class. Can you talk a bit about the value that private credit provides in the portfolio when incorporated alongside public fixed income investments?

 

Wesley: Sure. I think that value added comes in a couple of different ways. Firstly, additional return. The second is diversification. You're getting access to a new asset class with different return patterns that works alongside the public asset classes that, that you already have.

 

All of those, those two things actually come down to the third thing I want to mention, which is that private credit opens up a different universe of opportunities. Different companies who are not raising capital in other forms, companies raising capital in new ways, that's very tailored to their needs. And that is the essence of why, where these extra returns are coming from, where this extra diversification is coming from.

 

Holly: I love that it's additive and differentiating and John, as a one of the portfolio managers on these strategies, I imagine that is an exciting element for you. What else are you excited about with regards to this relationship with KKR?

 

John Queen, Fixed income portfolio manager at Capital Group

 

John: Well, I'm excited about two components really. First is the fact that our clients can now access this form of investing, this asset class. Traditionally all of our clients and our shareholders would be able to invest alongside the largest institutional shareholders in public bonds.

 

But in private, in the private side of things, private credit in particular, that was really only available to the largest, most sophisticated investors out there, like sovereign wealth funds and university endowments, etcetera. So now to have this opportunity for our clients to benefit from access to that asset class, the diversification benefits, the return opportunities there, I think it's tremendously exciting to be able to offer that.

 

The other piece of it is how well it fits what we already do. So, while that asset class will be new to our investors, it is not a new asset class and importantly, it is not new in how we manage portfolios.

 

So, when we think about The Capital System, multiple portfolio managers managing one fund or account, that's exactly what this is. This is simply another portfolio manager being brought under that umbrella. And so, as I think about managing the fund, I'm going to have multiple portfolio managers, including the KKR portfolio managers, as part of that whole spectrum that we're putting together in this fund, looking for the goals to achieve on behalf of our shareholders. So to be able to put that in the same kind of package that we're used to using, that's really exciting.

 

I would say finally, in another sense, this is again very similar to things we already do in the sense of multi-asset portfolios. We're already used to incorporating different asset classes into one portfolio. This is yet another asset class that we can look at, see how it fits, put that puzzle together to get a better outcome for our clients and shareholders.

 

Holly: I love that. Access to more companies, more portfolio managers and just more investment ideas in the portfolio overall. Thank you so much for joining us and I hope that you enjoyed this conversation.

 

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Checkpoint

Now that you have completed this lesson, you should be able to confidently:

 

  • Describe what a public-private solution is and how it expands your clients’ options.
  • Explain to your clients the key considerations of public-private solutions, including access, diversification and liquidity management.
  • Discuss the role of interval funds in facilitating access to private markets and how these vehicles may fit within your clients’ investment strategies.

Takeaways

Introducing Public-Private+ Solutions

Download

End of Lesson

Continue to the next lesson to learn about the two companies who have joined forces to offer these public-private solutions and this learning program: Capital Group and KKR. 

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For financial professionals only. Not for use with the public.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the interval fund prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
For Public-Private+ Funds: Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ are interval funds that currently provides liquidity to shareholders through quarterly repurchase offers of up to 10% of its outstanding shares. Capital Group KKR U.S. Equity+ is an interval fund that currently provides liquidity to shareholders through quarterly repurchase offers of 5% of its outstanding shares. To the extent a higher percent of outstanding shares are tendered for repurchase, the redemption proceeds are generally distributed proportionately to redeeming investors (“proration”). Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window. In addition, anticipating proration, some shareholders may request more shares to be repurchased than they actually wish, increasing the likelihood of proration. Shares are not listed on any stock exchange, and we do not expect a secondary market in the shares to develop. Due to these restrictions, investors should consider their investment in the fund to be subject to illiquidity risk.

- Investment strategies are not guaranteed to meet their objectives and are subject to loss. Investing in the fund is not suitable for all investors. Investors should consult their investment professional before making an investment decision and evaluate their ability to invest for the long term. Because of the nature of the fund's investments, the results of the fund's operations may be volatile. Accordingly, investors should understand that past performance is not indicative of future results.

- Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.

- Illiquid assets are more difficult to sell and may become impossible to sell in volatile market conditions. Reduced liquidity may have an adverse impact on the market price of such holdings, and the fund may be unable to sell such holdings when necessary to meet its liquidity needs or to try to limit losses, or may be forced to sell at a loss. Illiquid assets are also generally difficult to value because they rarely have readily available market quotations. Such securities require fair value pricing, which is based on subjective judgments and may differ materially from the value that would be realized if the security were to be sold. Situations involving uncertainties as to valuation of assets held by the fund could have an adverse effect on the returns of the fund.

- The fund is a non-diversified fund that has the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund were invested in a larger number of issuers.

 

For Public-Private Credit+ Funds:

- Bond investments may be worth more or less than the original cost when redeemed. High‐yield, lower‐rated, securities involve greater risk than higher‐rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

- The funds may invest in structured products, which generally entail risks associated with derivative instruments and bear risks of the underlying investments, index or reference obligation. These securities include asset-based finance securities, mortgage-related assets and other asset-backed instruments, which may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market's perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations.

- While not directly correlated to changes in interest rates, the values of inflation-linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional securities, such as stocks and bonds.

- The fund invests in private, illiquid credit securities, consisting primarily of loans and asset-backed finance securities. The fund may invest in or originate senior loans, which hold the most senior position in a business's capital structure. Some senior loans lack an active trading market and are subject to resale restrictions, leading to potential illiquidity. The fund may need to sell other investments or borrow to meet obligations. The funds may also invest in mezzanine debt, which is generally unsecured and subordinated, carrying higher credit and liquidity risk than investment-grade corporate obligations. Default rates for mezzanine debt have historically been higher than for investment-grade securities. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy.

 

For Public-Private Equity+ Funds:

- The fund also intends to concentrate in the financial services group of industries, and to invest at least 80% of its assets in securities issued by companies based in the United States.

- K-PEC and co-investment risks: The fund's investments in KKR Private Equity Conglomerate LLC (“K-PEC”) and co-investments alongside K-PEC or one or more other KKR vehicles that pursue private equity strategies entail additional risks. Private equity investments are typically illiquid, speculative, and difficult to value, often requiring multi-year holding periods with returns generally realized only upon sale or refinancing of a portfolio company. These investments depend on access to financing, and market disruptions or increased competition may limit opportunities and affect performance. The fund's significant investment in K-PEC creates concentration risk and a decline in K-PEC's value could materially impact the fund's returns. Co‑investment opportunities are competitive and limited and there is no assurance the fund will receive allocations or comparable terms and will generally have less information than for public companies. Through its investments in K-PEC or other KKR Vehicles and co-investments, the fund may have exposure to portfolio companies with limited operating histories, evolving markets, unproven technologies, and inexperienced management, which may require significant capital and create heightened vulnerability to downturns. Most holdings are illiquid, subject to resale restrictions and may require consents or be sold at a discount. Costs associated with investments in private equity are generally greater than those of investments in other asset classes. In addition to bearing their portion of the fund's fees and expenses, shareholders in the fund will indirectly bear a portion of the asset-based fees, incentive fees and other expenses incurred by the fund as an investor in K-PEC or other KKR Vehicles and in co-investments. Incentive fees are paid to KKR when the fund's investments in K-PEC or other KKR Vehicles and/or co-investments deliver returns in excess of a specified hurdle; when paid, these fees reduce the net realized returns of such investments.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
Capital Group and Kohlberg Kravis Roberts & Co. L.P. (“KKR”) are not affiliated. The two firms maintain an exclusive partnership to deliver public-private investment solutions to investors. KKR serves as the sub-adviser of Capital Group KKR Core Plus+ and Capital Group KKR Multi-Sector+ with respect to the management of each fund's private credit assets. KKR is not a sponsor, promoter, investment adviser, sub-adviser, underwriter or affiliate of Capital Group KKR U.S. Equity+.
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