Module 4: Supporting client needs through public-private solutions 4.4 Addressing client questions on public-private solutions

This video discusses a number of the most common questions and concerns from clients about investing in public-private funds and how to confidently respond.

Connor DeLaney

Director of global client solutions at KKR

Siobhan Broadbery

Public-private solutions sales specialist at Capital Group

7MINVIDEO

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Siobhan Broadbery, Public-private solutions sales specialist at Capital Group

 

Siobhan: Should I really invest in private markets? Are they durable? What are the risks? How are assets valued? We know that those are the kinds of things you're getting asked by curious clients. New investment offerings always bring skepticism. So, what’s the best way to address these concerns?  

 

Connor DeLaney, Director of global client solutions at KKR

 

Connor: Siobhan, let’s dive into all these and more. By the end of this video, we hope you’ll have the information you need to confidently field even the tough questions coming your way.

 

- Yes, alright, here’s one that I’m hearing a lot out in the field. “Why now?” 

 

- I hear that too and am curious how you answer. From your perspective, what is it about the current market environment that makes our two companies want to partner now? 

 

- Well, across the industry, there are several things driving timing. A large and growing part of the investable universe is now in private assets – for example, companies that aren’t publicly traded or lending that occurs outside of the traditional banking system. 

 

Private market investments were historically really considered out of reach for many investors, but now they’re increasingly seen as a way to access a wider investment universe. Product innovation has seen advances in semi-liquid fund structures which offer the potential to be made available to a broader set of investors.

 

- Those are great points, Siobhan.  

 

- Thanks. You know, Connor, I’m also hearing some debate amongst financial pundits on whether private markets aren’t a bubble or whether they’re a durable asset class and I’d love to hear how you respond to that. 

 

- Ok, here’s how I respond to that question: We believe private market opportunities are here to stay and that they can potentially have long-term benefits for investors.  

 

I also like to remind them that these types of investments are not new or untested. As KKR knows, they’ve been investing in private markets for decades. What is new, is the structure that Capital Group and KKR have unlocked with Public-Private+ Solutions. These funds help provide access for investors who’ve traditionally had limited or no exposure to private markets. And they may help you identify additional ways to diversify your clients’ portfolios.

 

Advisors may also get asked: “What’s the benefit of investing in Public-Private+ Solutions vs. more private focused options?” 

 

- Yep, for sure and here’s what I would say to that: Public-Private+ Solutions can offer distinct potential benefits that investors may find more appropriate compared to other private investment options. This includes potentially better liquidity terms, lower investment minimums and accreditation requirements and more familiar investment solutions that may complement existing core allocations. Public-Private+ Solutions have the flexibility to take advantage of potential relative value differences between public and private investments to maintain selectivity when it comes to originating loans and to manage risks across a broader range of assets and investment capabilities of both Capital Group and KKR.

 

Ok, here's a big one:  “How do Public-Private+ Solutions address the risks of investing in private markets?”   

 

- Right. This answer has layers. Capital Group and KKR designed Public-Private+ Solutions to help address some of the distinct risks and complications that come with private market investments. Those include valuations. The securities held in the Public-Private+ Solutions are subject to Capital Group's fair valuation policies and procedures. Capital lock-up. These funds do not have a lock-up period and have daily subscriptions. Administrative. The Public-Private+ Solutions are 40 Act interval funds, offering the same 1099 tax treatment as individual traditional mutual funds.  

 

Minimum investments. Public-Private+ Solutions have a low minimum investment of $1,000 dollars across most share classes. And finally, limited liquidity. Public-Private+ Solutions currently offer quarterly repurchases of 5% to 10% of the fund’s outstanding shares at NAV, depending on the fund.  

 

Please note, to the extent more than 5% or 10%, as applicable, of outstanding shares are tendered for repurchase, the redemption proceeds are generally distributed proportionately to redeeming investors. Due to this repurchase limit, shareholders may be unable to liquidate all or a portion of their investment during a particular repurchase offer window.

 

- Ok, Connor, here’s another one we hear a lot: “Why not just buy a public fund and a private strategy on your own instead of combining them?”   

 

- There is value in both approaches, in the end, it may make more sense for some investors to own these exposures separately. But we believe there are potential benefits to a single-integrated solution. 

 

- That’s right. And those include holistic portfolio construction. As it relates to the public-private credit funds, partnering with KKR allows Capital Group’s portfolio managers to have that 360-degree view of the fixed income market spectrum. The Public-Private Equity Fund will be managed solely by Capital Group as the investment adviser. The fund will invest in KKR vehicles and direct investments sourced by KKR for private equity exposure.

 

- And don’t forget, we have best-in-class managers. Capital Group and KKR offer what we believe is best-in-class experience in our respective markets. Each manager can play to their strengths and can bring the best of their investment knowledge into public and private sleeves. 

 

- That’s great Connor and I think it speaks to the power of this partnership, right? And the opportunities it could unlock for investors. Now, we’ve covered a lot of ground and while you may get some, or all of these questions from your clients, addressing their concerns comes down to having a clear strategy. It’s important to be transparent with both details and demystifying how Public-Private+ Solutions can fit into a portfolio. It’s also critical to understand exactly who’s managing the funds you’re considering. 

 

- We hope we’ve helped you shape those conversations and that you can identify who might be open to the potential benefits of these exciting investment opportunities. 

 

- Thanks for watching. 

 

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Deepen your understanding

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Public-Private+ Solutions have unlocked access to markets which have historically been limited to larger institutional investors and high net worth individuals. As these broader investment opportunities become available to more of your clients, it’s important to know how to address any concerns that may arise and help determine the appropriate fit. 

 

We’ve put together a list of common questions you may hear, as well as things to consider when researching and discussing whether — and with whom — to invest in public-private funds.

 

Timing

 

Why private markets, why now?

 

We believe Capital Group and KKR are uniquely positioned to help investors understand and invest in private markets. There are several trends we believe are driving the adoption of private market and alternative investments across the industry.

 

  • A large and growing part of the investable universe is now in private assets. They have earned a meaningful allocation in many investors’ portfolios.
  • Blending private market investments with public ones puts them within reach for more investors. This also provides a more holistic approach to accessing a wider investment universe.
  • Product innovation has seen advances in semi-liquid fund structures which offer the potential to be made available to a broader set of investors.

 

Durability 

 

Are private markets just a bubble? Why invest in Public-Private+ Solutions vs. other more private focused options?

 

Some of your clients may question the durability of investing in private markets or the benefit of blending. We believe these opportunities are here to stay and that they can potentially have long-term benefits for investors.    

 

Public-Private+ Solutions can offer distinct potential benefits that investors may find more appropriate compared to other private investment options. This includes potentially better liquidity terms, lower investment minimums and accreditation, and more familiar investment solutions that may complement existing core allocations. 

 

Public-Private+ Solutions have the flexibility to take advantage of potential relative value differences between public and private investments, to maintain selectivity when it comes to originating loans and to manage risks across a broader range of assets and investment capabilities of both Capital Group and KKR.

 

Blending 

 

What are some of the potential benefits of investing in Public-Private+ Solutions as opposed to just buying KKR Private Equity Conglomerate LLC (KPEC) and adding The Growth Fund of America® or one of Capital Group’s equity ETFs?

 

Holistic portfolio construction is just one of the potential benefits of a single-integrated solution. As it relates to the Public-Private+ credit funds, partnering with KKR allows Capital Group’s portfolio managers to have a 360-degree view of the fixed income market spectrum. The public-private equity fund will be managed solely by Capital Group as the investment adviser. The fund will invest in KKR vehicles and co-investments sourced by KKR for its private equity exposure.  

 

Capital Group and KKR offer what we believe is best-in-class experience in our respective markets. Each manager can play to their strengths and can bring the best of their investment knowledge into public and private sleeves.  

 

Risks

 

How do Public-Private+ Solutions address the risks of investing in private markets?

 

Capital Group and KKR designed Public-Private+ Solutions to help address some of the distinct risks and complications that come with private market investments. Those include: 

 

  •  Valuations 
    The securities held in the Public-Private+ Solutions are subject to Capital Group's fair valuation policies and procedures. 
  •  Capital lock-up 
    These funds do not have a lock-up period and have daily subscriptions.
  •  Administrative  
    The Public-Private+ Solutions are ’40 Act interval funds, offering the same 1099 tax treatment as traditional mutual funds.   
  • Minimum investments 
    Public-Private+ Solutions have a low minimum investment of $1,000 across most share classes.
  • Limited liquidity 
    Public-Private+ Solutions currently offer quarterly repurchase offers of 5% to 10% of the fund’s outstanding shares at NAV, under normal circumstances, depending on the fund.

Checkpoint

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

 

  • Address client questions about how public-private solutions fit within current industry trends.
  • Distinguish for your clients the potential benefits, features and risks of integrated public-private solutions from traditional approaches.
  • Communicate how public-private solutions can support a wide range of client profiles.

Takeaways

FAQ on public-private solutions

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End of Course

You now have a greater understanding of the world of public-private solutions. Don’t forget to review lesson takeaways here.

 

As you integrate public-private solutions into your practice, continue to reference the materials in this course as they are relevant to you.

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.
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