Top adviser backs private markets but says ‘keep eyes open’ to risks

Viola Private Wealth founding partner Charlie Viola said investors now have far greater access and he’s a private market “enthusiast”.

“Once upon a time, this was an area where you could only get access if you had a family office, an institutional investor or a big super fund or a very high-net-worth individual where you could handle the significant lockup of capital,” Mr Viola told The Australian’s The Money Puzzle podcast.

He said many funds had responded to the demand for private equity, debit and credit by creating evergreen vehicles that provided normal investors with “a great way of diversifying”.

“What we’ve seen with the democratisation of these private markets is now investors are getting access to all the things that they couldn’t before.”

With high-profile private credit group Metrics Credit Partners recently forced to defend its standards – after a downgrade of three key products from ratings house Lonsec – Mr Viola said his enthusiasm for unlisted assets remained undiminished.

Metrics recently did a debt-for-equity deal with Pacific Hunter, the owner of the Rockpool restaurants group, which raised eyebrows across the investment sector. But Mr Viola said the process of trading debt for equity is actually how private credit groups protect their investors’ capital.

Nonetheless, Mr Viola warned investors needed to “keep their eyes wide open” when dealing with any area of unlisted investments.

“Try not to get intoxicated by the returns that managers tell you they’re going to produce and understand what it is that they’re investing in,” he said.

“Understanding how long they are going to have your capital, what sector of the market, what the risks are and what the liquidity constraints are, is super important.”

Two key issues facing investors in private markets are the lack of transparency and the lack of liquidity, which is how easily the assets can be bought and sold.

Mr Viola said new investors should seek wide diversification and clearly distinguish between categories. For example, he believes private credit is much less risky than private equity because private credit is invariably asset-backed.

Private credit is where managers lend to operations that might previously have been clients of banks, but banks are often now restricted in doing such deals due to central bank demands linked with capital adequacy ratios.

In contrast, private equity involves investing in companies that are not listed on the sharemarket, covering a huge spectrum of activity from venture-stage investment to pre-IPO funds.

In common with private credit, private equity has faced some struggles in recent months as an estimated 12,000 companies around the world remain on the books of private equity funds that are unable to sell them to trade buyers or to float them on the sharemarket.

At the same time, financial engineering inside private equity, such as “continuity vehicles” – where investors can buy and sell from investments that have yet to go public – is also attracting controversy.

Mr Viola, who placed fifth on last year’s Barron’s Top 100 Financial Advisers list, was pivotal in setting up the Pitcher Partners wealth division in 2003 before leading a management buyout that created Viola Private Wealth. He is also a board member at NRL team Wests Tigers.

“We want good-quality private debt or private credit in the portfolio because it generates really good-quality cashflow,” Mr Viola said.

“We, in our business, very much use private debt, private credit as a defensive end of the portfolio. We use it to produce income for clients.”

Upmarket financial advice remains a hotbed of corporate activity. The sector has enjoyed a string of merger and acquisition activity in the past five years, largely led by international companies.

Among the best-known deals, Focus Financial Partners purchased a strategic stake in Escala, EFG International became a majority shareholder in Shaw and Partners, and Crestone was acquired by LGT International, a unit of the Princely family of Liechtenstein.

This article first appeared in The Australian as Top adviser backs private markets but says ‘keep eyes open’ to risks