How everyday investors are getting their hands on private returns

From the ASX to evergreen funds on Hub24, the entry ticket for private assets has plummeted. But bypassing the $250k income hurdle comes with a catch.

The clue to why it’s hard to find out how to invest in private markets – we are talking about private equity and private credit – is in their name: they are, er, private.

Until relatively recently they have not been easy to buy on the sharemarket – although private credit investments, in the form of listed investment companies and exchange-traded funds that invest in private assets – have been available to buy on the ASX.

Importantly, these listed investments, because they can be readily sold, don’t have the so-called illiquidity premium that is a feature of traditional private credit products – essentially that means they pay a higher interest rate than more easily traded investments. But they do invest in assets that generally pay a higher interest rate than bank deposits (and therefore carry a higher risk).

Direct investments in private equity investments for ordinary investors have been harder to find.

“There are generally three ways you can invest in private equity: via your superannuation; directly, if you qualify as a wholesale investor … and via a fund-of-fund or an ‘evergreen’,” says Chris Petzoldt, the founder and chief executive of Pretian Squared, a firm that helps companies to value assets.

We’ll explain each of those, but before we do let’s look at an exception – the soon-to-list AIX from Pengana. This fund, which will trade on the ASX, aims to buy shares in unlisted artificial intelligence companies, including OpenAI and Anthropic. It will join Pengana’s other PE fund, the Pengana Private Equity Trust, known as PE1. The two funds will be the only listed PE investments on the ASX.

AIX is not a traditional private equity fund like the kind made famous by movies such as Wall Street or Pretty Woman – where a fund buys an undervalued company, extracts efficiencies (often by selling assets or cutting staff numbers), and then adds debt before selling it on to other investors – it is a so-called growth equity fund.

“Growth equity is when you take a really high growth company that is hungry for capital, and you give it equity capital. Very rarely would they use debt in it because it wouldn’t make sense,” says Russel Pillemer, CEO at Pengana.

“If you go into AIX, which invests in private companies, you’re only paying private market multiples, which are significantly lower than equity market multiples,” he says.

“By the time these companies reach public markets, a significant portion of their return potential may already have been captured by private investors. Investing in unlisted securities can provide earlier participation in that value creation,” the offer document says.

Importantly, before it lists on the stock exchange, only so-called sophisticated investors will be able to buy it. But it’s open to everyone once it lists.

The wholesale investor test

To qualify as a sophisticated, or wholesale, investor you normally need an accountant to verify that you have a gross income of at least $250,000 a year over three years, or net assets of at least $2.5 million.

That qualification is normally a key hurdle to reach if you want to invest in any private asset. It’s important because once you invest as a sophisticated investor you give up many of the protections offered to ordinary investors by the Australian Securities and Investments Commission or the Australian Prudential Regulation Authority.

If you don’t qualify as a sophisticated investor, or you do, but you want some extra legal protection that having a financial adviser gives you, another way to get access to private opportunities is through a financial adviser or planner who can advise you to invest in them through products sold on investing platforms such as Netwealth, Hub24 and Praemium.

These platforms have an array of investments that qualify as private equity and private credit. These might include so-called evergreen private equity funds, which differ from traditional PE funds because they have no fixed lifespan. They are always open to new investments and exits and continuously reinvest proceeds.

Traditional PE funds invest in certain assets for a fixed period, draw down funds from investors as they make investments and then return all the investments and profit at the end.

Evergreen funds require much smaller investments – usually in the tens of thousands. Traditional funds used to require investments in the millions of dollars, but Petzoldt says that has fallen recently.

The size of both means they are generally limited to very wealthy sophisticated investors.

The super exception: PE for all

But some of the most unsophisticated investors can get indirect access to private markets through their superannuation fund. AustralianSuper, Aware Super and Rest are among those that say they include private market investments in their funds.

You won’t know what you are buying, but you will still have access to the sector, especially if your super is held in high-growth options. ASIC noted last November that super was the main way most Australians invested in private markets.

Also, many mums and dads will have a private credit investment if they lend money to their children to buy property.

But access is not the only issue when it comes to private investments. You will have to overcome the problem of getting information about them.

Traditionally, the documentation and disclosure in private markets is much less than in public markets. To find out whether an investment is worth it, you will need to be prepared to ask questions, do the appropriate research and question everything you hear if you want to minimise your risk.

If you are prepared to overcome all those obstacles, only then will you be able to access the higher returns on offer in private markets – remembering always that higher returns will come with higher risk.

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