Claire Smith

For most investors, Australian direct property has always looked like a safe and grown-up choice – tangible, local, familiar. In comparison, global private real estate has often looked like the exotic alternative. But Claire Smith, head of investment directors, public and private markets at Schroders, says the facts increasingly point the other way.

The familiar Australian residential trade is more exposed to changing tax policy than it used to be, which may prompt a shift in thinking, Smith says.

“For many Australian advisers, that line from their clients that they already own an investment property effectively ends the conversation about further investment before it begins.

“But owning one or two Australian assets is not the same thing as owning a genuinely diversified global property allocation.

“Concentration in a single geography, structure or sector can erode the portfolio benefits real estate is meant to provide. But a well-diversified pooled vehicle can preserve those benefits and reduce concentration risk. Institutional investors have understood this for years.

“The global opportunity set offers deeper diversification across regions, sectors and structures because of its access to institutional and off-market transactions, and the ability to participate in operational businesses and platform profits. At the same time, the global real-estate cycle is now offering better relative-value opportunities, precisely because repricing and recovery are not happening everywhere at once.

“It offers something Australian direct property often cannot – genuine global diversification, income backed by structural demand drivers, and access to active operational value creation, rather than passive rent clipping alone.

“None of this means advisers should treat the fund as a drop-in substitute for risk-free income.

“Private real estate carries liquidity, currency, valuation, tenant, development and market risks, and the semi-liquid structure uses managed liquidity rather than daily dealing.”

But she says, for advisers and consultants who want property exposure to do more than concentrate clients in one country, one tax code and one familiar asset class, a global real estate fund could be the answer.

“Global exposure gives advisers access to the part of the opportunity set that local direct ownership usually misses – different policy environments, different demographic drivers, different economic cycles, different repricing speeds, different occupier markets and different lease structures.

“This is particularly relevant in the current environment. The traditional Australian direct property model may look materially less attractive in the years ahead as proposed changes to negative gearing and capital gains tax concessions begin to reshape the post-tax return profile of local property investing.”

For advisers, that changes the conversation, Smith says.

“Australian direct residential property has often been sold not only as a growth asset, but as a tax-aware strategy. But if the tax shield is being narrowed for future purchases of established housing, then the investment case has to stand more squarely on underlying economics.

“That is where a globally diversified real-estate strategy starts to look more compelling because it does not depend on a single domestic tax regime to do the heavy lifting. Instead, it earns its keep through portfolio construction, sector selection, local execution and operational value creation.”

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Claire Smith

Schroders says fears around artificial intelligence (AI) disrupting software businesses have been overblown, with private equity investors taking a far more selective and measured approach than public markets.

Claire Smith, head of investment directors, public and private markets at Schroders, said investors had adopted a “guilty until proven innocent” mentality toward software companies, despite many businesses remaining deeply embedded in their customers’ operations.

“We think the market has overreacted,” said Smith.

“There’s been a view that AI is killing software. AI is absolutely reshaping parts of the software market, but the idea that every software company is suddenly at risk simply isn’t how private investors are thinking about it.

“When you look underneath the surface, many of these businesses still have highly sticky customer bases, proprietary data and critical functionality.”

Smith said Schroders had conducted a detailed “AI threat assessment matrix” across its software investments to determine which businesses faced genuine disruption risk and which were likely to remain resilient.

“We assessed whether AI could reduce the number of software seats being sold, or potentially make a platform redundant altogether,” she said.

“In our semi-liquid private equity fund, only around 2 per cent of the portfolio fell into what we classified as high risk.”

Smith said software businesses servicing highly specialised industries, particularly those handling sensitive or operationally critical data, remained difficult to replace.

“You’re not going to vibe-code your way around payroll systems handling confidential patient data. Businesses still need reliability, compliance and security. AI is not eliminating that,” she said.

Private equity valuations had also been less volatile than listed markets because private investors were not caught up in the rapid repricing of large US technology stocks.

“At one point we were valuing our portfolio at a 40 per cent discount to listed markets,” Smith said.

“That discipline meant when listed markets sold off, we didn’t experience the same level of volatility.”

While AI disruption remains a risk for some companies, Smith said the technology was also creating significant investment opportunities.

“We have invested in AI-linked businesses including a data annotation company servicing major artificial intelligence groups including OpenAI, Meta and Nvidia. We prefer businesses that are benefiting from the growth in AI infrastructure, rather than trying to predict which individual AI applications will ultimately win,” said Smith.

Beyond technology, Smith said many of the strongest private equity opportunities continued to come from stable, cash-generative businesses operating in niche industries.

“Sometimes the best investments are the boring ones. We look for companies with recurring revenues, strong customer relationships and services that businesses simply cannot switch off during difficult economic periods,” she said.

Smith said a growing number of opportunities were also emerging from founder-led and family-owned businesses globally as ageing owners seek succession solutions.

“Private equity can provide the capital and expertise to help these businesses continue growing while preserving the legacy founders have built,” she added.

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Claire Smith

Investors shouldn’t overlook fundamentals as increased volatility and recent sell offs across the SaaS sector leads to broader questions of whether it is facing a sentiment-driven correction tied to AI headlines, Claire Smith, head of investment directors, public and private markets at Schroders Australia says.

She says that while AI is impacting some companies, it is not happening across the board and it requires a more considered approach from investors.

“AI is changing the rules and businesses will come under pressure, but others will strengthen their position by embedding AI into their products,” Smith says.

“Treating the entire sector as one ignores the reality that outcomes will be very different from company to company.”

Agentic AI and the rapid democratisation of software creation are expected to challenge parts of the SaaS model, particularly businesses reliant on per-seat pricing or those without strong proprietary data or deep integration into customer systems. However, the key issue is whether AI’s software disruption will play out across different companies.

Michael McLean, head of private equity technology investments at Schroders says a blanket sell-off across the SaaS sector is not justified.

“While agentic AI technologies will potentially reduce the number of seats for certain specific SaaS applications, a blanket sell off across the industry as a whole isn’t really warranted. It’s company specific.”

Schroders says assessing AI risk requires a clearer framework, distinguishing between the potential for AI to reduce user numbers and the risk that it replaces core product features. It also highlighted that private markets may be better placed to respond to these shifts.

McLean says a clear focus is on how quickly companies can adapt, whether through product changes, pricing adjustments or strengthening their competitive position.

“AI is changing so quickly, and we’re able to have almost a real time pulse on how it’s impacting the portfolio and strategy,” McLean says.

“There’s a clear benefit of early visibility into emerging technologies. Our long-standing involvement in venture investing provides insight into how quickly AI innovations are moving from development to real-world adoption, helping inform investment decisions.”

Schroders says while technology represents a portion of the portfolio, software doesn’t dominate its private equity exposure. A smaller share is in software and SaaS businesses, which helps reduce exposure to volatility in that segment and reinforces the need for active management.

McLean says the broader message for investors is that AI is not a simple negative for software, but a force that is altering the sector in more complex ways.

“Investors shouldn’t be writing off software altogether. But it is important to better understand where the risks sit, where the opportunities are, and taking a more selective approach in a rapidly changing environment.”

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Claire Smith

Rising concerns about concentrated US equity markets could push investors to private equity assets in 2026, thanks to greater diversify of asset selection coupled with lower entry multiples, creating the potential for superior risk-adjusted returns, according to Claire Smith, head of investment directors, public and private markets at Schroders.

As investor attention focuses on large-cap technology companies linked to the AI boom in listed markets, Schroders 2026 Outlook reveals how small and mid-cap private equity is forging a different path.

“While on the surface, things look reasonable for listed markets, the reality is that there are rising concerns among investors. Scratch beneath the surface and there’s still plenty to keep an eye on. Inflation threatens to kick back into gear, conflicts in Ukraine and the Middle East continue are complicating the geopolitical picture and the weaponisation of trade could again fuel economic uncertainty in 2026,” said Smith.

Moreover, as capital in listed share markets continues to flow to large technology companies driven by the AI boom, concentration risks loom. In contrast, the large investable universe and favourable supply-demand dynamics of small and mid-cap private equity assets could provide investors with a unique combination of sound fundamentals, attractive valuations, and improved sector and geographic diversification, according to Smith.

“Our activity continues to be in small- and mid-cap private equity, where we see more attractive valuations and better prospects for diversification compared to crowded large-cap share markets,” she said.

“Recent private equity fundraising trends indicate rising interest in strategies that promise increased liquidity, diversification, and flexibility. But this raises important questions for investors, especially around pricing, fund manager discipline in the private equity space and future sources of return.”

Smith remains cautious around segments of the market where competition is pushing up prices, particularly in Limited Partnership (LP) secondaries, instead focusing on continuation vehicles (CVs) where she sees more compelling returns.

“CVs have become an increasingly important tool for private equity managers to extend ownership of high-conviction assets beyond traditional holding periods. By enabling managers to retain and further develop portfolio companies through their next stage of growth, these vehicles align long-term value creation with investor liquidity preferences.

Heading into 2026, Smith believes that markets will continue to paint a complex picture for investors.

“Markets continue to present a complex picture – optimism in the headlines, balanced by ongoing economic and geopolitical uncertainties – and a careful approach is essential.

“Exits are a critical part of the private equity proposition – identifying strong companies, growing them and ultimately exiting them – and the small to mid-cap part of the market provides the greatest diversity of exit routes.

“A greater selection of routes to exits allows us to bob and weave cycles to find the right pathway through today’s turbulent markets,” Smith added.

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Claire Smith

In a new white paper Schroders challenges conventional thinking about risk in private equity, urging financial advisers to reconsider how they define and pursue investment safety.

While many investors gravitate toward low-risk, low-volatility strategies, particularly in today’s unpredictable market environment, Schroders argues that this mindset may inadvertently limit long-term returns.

In today’s complex and uncertain investment landscape, it’s tempting to chase safety in low risk and low volatility for investors. But history and data show that avoiding risk does not always lead to better returns. In fact, the opposite can be true.

Schroder’s believe the most compelling opportunities lie not in the well-trodden paths of large-cap investing, but in the overlooked and undercapitalised small and mid-cap private equity market. This segment offers outsized potential for value creation when approached with discipline, expertise, and a rigorous selection process.

For investors seeking long-term value over short-term comfort, fortune truly favours the small, and the brave.

Read the whitepaper by Vahit Alili Senior Investment Director and Claire Smith Head of Business Development Australia, Private Markets.

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Claire Smith

Support for private equity is growing, particularly among Australian family offices and high net worth individuals, with investment in private companies offering potentially better returns and lower volatility than listed equities, according to head of business development, private markets, at Schroders, Claire Smith.

For Australian investors, the global private equity universe is much broader and deeper than the domestic equity market and wealthier investments are moving to this asset class for the low volatility and attractive returns it provides.

“Family offices and high net worth investors (HNWI) get it, evidenced by their strong and growing support for the asset class, and alternatives, in general,” said Smith.

“When looking at private equity investment and other private assets, on average 51 per cent of family offices plan on increasing their allocation to private equity, whereas only 6 per cent plan on reducing their allocation, according to a 2023 survey by Cerulli Associates. This effectively represents a net increase of 46 per cent across this cohort. Looking at ultra-high net-worth, high-net-worth and the mass influent investors, we saw increases of 32 per cent, 30 per cent and 28 per cent, respectively,” she said.

According to Smith, private equity investment in small companies offers superior returns compared to investment in larger private companies.

“Research house Preqin has found that fundraising among large cap funds increased 10.7 times from 2010 to 2022 while deal flow only rose 3.6 times.

“In other words, there was three times as much growth in money as there was in deals in the large cap space. The result of this supply and demand imbalance is higher entry multiples for investors, adversely impacting potential growth multiples,” Smith said.

“On the flipside, in the small cap and middle market, deal flow increased 4.2 times from 2010 to 2022 while fundraising only rose 2.9 times. This dynamic is creating tailwinds for private equity investors, enabling managers to buy small or mid-sized companies at lower entry multiples and sell them later, when they are larger,” Smith said.

“While a company’s size is not an indication of its performance, all things being equal, managed funds that buy small to mid-cap private companies statistically outperform their large cap managers given lower entry multiples, a longer runway for growth and a greater number of investment opportunities,” she said.

According to Smith, the family business represents a significant chunk of the wealth of many HNWIs and ultra-HNWIs. They have seen, first-hand, the many potential benefits of private investment, including superior returns compared to listed shares, lower volatility, and diversification through exposure to a broader mix of industries and companies at various stages of the business cycle.

“Not surprisingly, family offices and HNWIs are among private equities’ biggest cheerleaders. Their long-term investment philosophy and approach, which often spans generations, is compatible with private assets,” she said.

“This opens up opportunities to investments which can create great value and boosts the performance of private equity compared to listed markets, which typically cater to larger companies,” Smith said.

“As we have seen recently, listed markets involve a lot more volatility, and a lot of psychology is priced into listed shares, with people often panic selling. You can remove that through private equity investing, which is based more on company merits. As a result, private equity is less volatile and has historically provided a higher return over a long-time horizon, higher than listed markets, and that return is delivered to investors at a lower volatility,” Smith said.

Schroders Capital’s private equity investments, which include early-stage venture capital, growth and small to mid-cap buyout strategies across semi-liquid and closed ended funds.

The Schroders Specialist Private Equity Fund has returned 15.9 per cent per annum after fees over the five years since inception in 31 March 2020 to 30 April 2025.^[1]

———-

Notes:
[1] https://www.schroders.com/en-au/au/adviser/fund-centre/#/fund/SCHDR_F0000159UK/schroder-specialist-private-equity-fund/AU60SCH00380/profile/

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Claire Smith

Schroders head of Australian equities, Martin Conlon, has warned against paying too much for assets given an underlying disconnect between share prices and the real economy and says equity prices will remain vulnerable next year as the cost-of-living climbs in Australia.

The Australian equity market is currently witnessing divergent trajectories between the financial economy and the real economy. While asset prices continued to rise in 2024, this growth is not reflected in the real economy, leading to concerns about the sustainability of this trend, according to Mr Conlon.

“Equity markets continue to ride the wave of money which is supporting asset prices but not living standards. The difference between fundamentals and multiples mean company valuations are like corks on the ocean, driven by sentiment and news. Whether and when we revert to fundamentals is impossible to predict, but waves do tend to break eventually,” Mr Conlon said.   

One of the main drivers of this disconnect is the Australian housing market. “The housing market continues to be a central issue, with rising costs contributing to inflation and cost of living pressures. The high demand for housing has led to a surge in prices, which is not sustainable in the long run. As interest rates rise and affordability decline, there is a risk that the housing bubble could burst,” Mr Conlon said.

Adding to risks for equities is that the strong run over the past year in Australia has been driven by an expansion in earnings multiples rather than earnings growth. While share prices have increased and earnings multiples expanded, they may not be supported by corresponding increases in company profits, leading to concerns about overvaluation.

“Underlying this multiple expansion were substantial gains in the very large financials sector and enormous gains in the smaller, but increasingly large technology sector. While the property sector also saw multiples elevate, one could substitute data centres, as the heavy lifting was done by Goodman Group.

“Multiples for materials, energy and consumer staples remained fairly moribund, with materials and energy retaining the mantle as the cheapest sectors. While ‘average’ price-earnings (P/E) ratios are now substantially above long-term averages, these averages are flattered by the high benchmark weightings and earnings dominance of materials and financials,” he said.

Another risk factor to consider, Mr Conlon said, is Australia’s reliance on China. If the Chinese economy slows, there is a risk that demand for Australian exports could decline. This could have a negative impact on the Australian equity market.

“Subdued sentiment on China and poor affordability and economics in housing construction are creating the preconditions for depressed multiples for Australian shares and jeopardising future returns. In an environment in which investors become ever more attuned to chasing popular themes at incredibly rich valuations, it is perhaps understandable that most investors are happier running with the crowd than feeling lonely,” Mr Conlon said.

“However, there can be no hiding from China’s importance as a demand source for Australia’s exports, but as a production rather than consumption-led economy, economic weakness is usually met through stimulating additional production. Without incremental domestic demand to absorb this production, China is increasingly becoming an intermediary between raw materials and export markets.

Mr Conlon also sees problems for Australian lithium producers.

“Lithium spodumene prices are languishing at not much above US$700/t and lithium carbonate around US$10,000/t, well below what investors, including Rio Tinto in its Arcadium Lithium acquisition, expect as the long-term price. While wanting to be more optimistic on the prospects for the lithium sector, our enthusiasm is tempered by valuations which still reflect long run pricing well above the costs of most players.”

Despite these challenges, there are also opportunities for investors in the Australian equity market, Mr Conlon said.

“There are plenty of companies available for sale at sensible multiples if one is prepared to see attraction in the more mundane characteristics of durability and profitability rather than alluring growth prospects and a large Total Addressable Market.”

“Many of the most appealing investments from our perspective are centred in real economy businesses across the materials and energy sectors,” adds Conlon.

“Subdued sentiment on China and poor affordability and economics in housing construction are creating the preconditions for depressed multiples and attractive future returns.”

Schroders’ outlook also delves into the private equity landscape, where it is anticipating a more favourable environment in 2025.

Claire Smith, head of private assets sales with Schroders, predicts that 2025 will be a year of opportunity.

“While 2024 has been a subdued year for dealmaking, we are beginning to see promising green shoots that presage brighter times ahead in 2025.”

“Private equity, especially that in which Schroders invests, shows signs of resilience and growth. The interplay between falling interest rates and easing inflation sets the stage for improved multiples.  Exit values in the global market seem to be stabilising, too, with a recent uptick in sponsor-to-sponsor exits.”

“As we look to the year ahead, many of the dynamics that have put downward pressure on multiples should subside or reverse. Namely, falling rates and cost pressures should promote higher multiples as borrowing costs go down and cashflows improve,” said Ms Smith.

Ms Smith said Schroders prefers the small and middle markets where valuations are attractive.

“There remains a significant valuation discount for small to mid-sized buyouts when compared to their larger peers, suggesting a difference in perceived value within the market,” she said.

 “These markets are diversifying, tend to perform well during volatility, and the law of large numbers makes it inherently easier to generate meaningful multiples on small companies than on large companies.

“Importantly, too, operating in the small and middle markets means we’re not reliant on a still frozen IPO market for exits. Rather, our exits tend to be into the larger part of the market where a large pile of dry powder remains,” she said.

Smith also flagged Schroders’ preference for investment in “GP-led secondary” funds, a segment of the private equity market where existing investments are rolled into a new fund under the direction of a general partner.

“Sponsors engage in GP-led transactions to enhance the value of a portfolio company by allowing additional time and/or capital for further strategic development. By executing a GP-led transaction, sponsors can adopt a longer-term perspective on a company, effectively extending the holding period of an asset beyond the conventional four to six years.”

“More and more dedicated strategies are beginning to focus on GP led secondaries, and the main issue most will encounter is that the majority of GP-led secondary deal flow is in the small to mid-cap market. Additionally access to these prized assets will often be restricted to existing investors and structured and executed on a proprietary basis.”

And while the election of Donald Trump has stoked volatility, Ms Smith believes Private Equity could stand to benefit.

“Finally with the new Trump administration, there could be more volatility in the market, and our research shows that private equity delivers most of its long term outperformance during more volatile periods.  Private equity has historically outperformed listed markets by 4% per annum, but when you look at times of higher volatility this outperformance increases to 8 per annum%. If we are indeed in for more turbulent times, private equity could be a nice place to hide.”

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Claire Smith

Private equity offers investors several distinguishing characteristics over listed shared, including more diverse investment opportunities and lower volatility, according to head of private assets sales at Schroders Australia, Claire Smith. Global private equity has also outperformed global share markets in recent years, including during share market downturns, highlighting its greater resilience as an asset class than listed equities.

Private equity investment offers access to companies in diverse stages of maturity and size. This opens up opportunities to investments which can create great value and boosts the performance of private equity compared to listed markets, which typically only cater for larger company sizes which can afford to deal with the costs of listing on a stock exchange, according to Ms Smith.

“Access to companies of different sizes and stages of their lifecycle can provide important diversification benefits.  Of course, this access comes with a trade-off, in the case of private equity investors are trading off liquidity for this differentiated company access.”

However, liquidity can be a double edged sword.

“Listed markets involve a lot more momentum and volatility, and a lot of psychology is priced into listed shares, with people panicking and selling at the wrong time. You remove a lot of that from private equity investing, where you are usually locked-in for a longer time period, and company investments and divestments can be more focused on long-term outlooks rather than short term news,” she said.

“As a result, private equity has historically proven less volatile and offered a higher return over a long-time horizon, higher than listed markets, and that return has been delivered to investors at a lower volatility.”

According to Ms Smith, some of the best opportunities in private equity are in small to mid-cap companies. This segment has historically outperformed the wider private equity market and is often priced at a lower multiple than large companies, where there is less capital seeking those assets.

“Roughly 70 per cent of invested capital in private equity markets goes to the large cap end of the market, defined as companies with greater than US$1 billion in enterprise value, whereas only 30 per cent is going into the small and mid-cap part of the market, or companies with less than a US$1 billion valuation,” said Ms Smith.

“When you look by number of companies, there are far fewer companies at the large cap end and there are many more companies at the smaller-cap end of the market. So, we like that smaller to mid-cap part end of the market as there tends to be less cash chasing a lot more deals,” said Ms Smith.

“We find attractive strategies which are under the radar compared to investing in larger companies, and prefer small to mid-cap companies which have a clear plan on how to add value to those companies whether by increasing sales, expanding to other regions and/or improving operational efficiencies.

“So we buy smaller companies and make them bigger, more valuable and more attractive to the higher end of the market, that is, larger private equity funds or larger companies, and we then aim to sell at a profit. In other words, we buy low and sell high, which creates value for our investors.”

According to Ms Smith, there is a large difference between different private equity fund managers.

“The dispersion is massive, and if you pick the wrong fund manager it can be hard to get out. So, you really have to do your due diligence when it comes to private equity fund managers, many of whom are opaque about their investments and have lengthy lock-up periods.

“Investors should look for a fund manager that is transparent about their investments and transparent about where it invests investors’ money.

“Schroders has reduced its minimum investment from $500,000 to $20,000, offers investors a lot of information about the investments it makes and has managed lock-up periods to just a couple of quarters. This has helped to open up this asset class and democratise private assets, which is a trend we expect to continue,” Ms Smith said.

Schroders Capital’s private equity investments include early-stage venture capital, growth and small to mid-cap buyout strategies across semi-liquid and closed ended funds.

The Schroders Specialist Private Equity Fund has returned 15.9 per cent per annum after fees since inception in 31 March 2020, to 31 August 2024.  The Fund aims to generate an absolute return of 10 to 12 per cent, net of fees, over periods of five years and longer.

“We continue to observe a high level of activity in the market and in our investment pipeline. We therefore remain confident in our ability to continue to be highly selective and deploy capital in the current environment,” said Ms Smith.

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Claire Smith

According to new research from Schroders, private equity funds that invest into small and mid-cap companies perform better than their large cap peers, creating superior returns.

“Any private equity fund that is well managed, with the right portfolio of investments, can generate attractive return. But large size is not a guarantee of performance, and our research has found just the opposite,” said Claire Smith, head of private assets sales at Schroders.

“Our research shows that, all things being equal, private equity funds that buy small and mid-cap companies statistically perform better than their large cap peers thanks to a greater number of opportunities, lower entry multiples and a longer runway for growth,” said Ms Smith.

That is backed by data. On average, small and mid-sized private equity managers – of which Schroders Capital is one – have outperformed their large private equity peers, both on a net total value paid in (TVPI) basis for vintages after 2005 and on a net internal rate of return (IRR) basis for vintages after 2009, as the charts below show.

Past performance is not a reliable indicator of future performance.

“This trend can also be seen across different geographic regions and investment strategies. Between 2000 and 2017 across Asia, North America and Europe, small and mid-sized funds delivered higher net returns than large private equity funds, while small and mid-venture, growth and buyout funds also outperformed their large counterparts,” Ms Smith said.

“Big superannuation funds have huge amounts of capital to deploy and arguably too few resources to filter opportunities outside the large and mega-cap buyout space. So that’s where they go, and it’s costing them in terms of returns,” she said.

According to data from global research firm Preqin, fundraising among large-cap funds between 2010 and 2022 grew by 10.7x while deal flow grew at 3.6x. This imbalance between capital supply and demand pushed up entry multiples, thereby compressing overall growth multiples for investors.

Small and mid-sized funds, by contrast, saw deal flow growth of 4.2x against fundraising growth of just 2.9x. The lower supply of capital, coupled with relatively higher demand, encouraged lower entry multiples, paving the way for superior returns.

“These lower entry prices make a big difference. In short, we buy companies at low entry multiples while they’re small or mid-sized, and sell them up market when they’re large caps, ensuring a relatively better return for investors,” Ms Smith said.

Historically private equity has only been available to institutions and high net worth investors. But now, with more private equity funds being offered to retail investors and minimum investments amounts falling, private equity is attracting interest from a greater range of investors.

The Schroder Specialist Private Equity Fund has returned 17.4 per cent per annum after fees since inception in 31 March 2020, and 13.7 per cent return over the year to 31 December 2023, after fees.  The Fund aims to generate an absolute return of 10 to 12 per cent, net of fees, over periods of five years and longer, providing attractive returns for investors with a long-term investment horizon.

“While the underlying investments are illiquid private equity assets, the fund provides investors with the opportunity to access their capital on a quarterly basis, noting a cap of 5 per cent of the net asset value applies at the level of the underlying global fund, opening up the opportunity to a greater range of investors,” said Ms Smith.

The Fund has a “Recommended” rating from both Zenith and Lonsec. 

It is available on most platforms including: BT Panorama, BT Wrap, AMP MyNorth, Macquarie Wrap, uXchange, Xplore Wealth, HUB24, Power Wrap, Mason Stevens, Insignia Expand, CFS FirstWrap / Edge and Netwealth.

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Smith says private equity has proven its place in a portfolio having historically delivered higher returns at a lower volatility.

“In the current economic environment, investors are looking for asset classes to provide diversification from traditional listed equities and bonds, particularly at present due to the increasing correlation between these two asset classes.”

“Historically, asset classes like private equity have remained out of reach to the general investor, with investment vehicles traditionally requiring high minimum investment amounts and decade-long commitments.”

In recent times, Smith says she has seen the democratisation of private assets, with fund managers creating a suite of open-ended, semi-liquid funds that allow investors to access this asset class with a much lower commitment and more palatable liquidity profile.

“Generally these funds have a quarterly redemption cycle. This may still be deemed too illiquid for certain investors, however there are many that find this trade-off of liquidity for access to differentiated asset types very attractive.”

Smith says individual investors and smaller institutions have been quick to embrace open-ended, semi-liquid funds for private equity as they overcome many of the access constraints and complexity of closed-ended funds.

“Many semi-liquid, open-ended funds are structured such that when an investor subscribes to the fund, 100 per cent of the investment amount is invested into the fund at the next trading date, giving immediate access to an existing portfolio of companies.”

“When investments within an open-ended fund are exited, the money is typically either made available to investors wishing to redeem, or if there is more capital than redemption requests, the proceeds will be re-invested into new opportunities. This means investors stay continually invested and exposed to a continuously refreshed portfolio of companies.”

Smith says, for greater liquidity reasons, the manager will hold some of the capital in cash – generally in the range of 10-20 per cent – to provide a runway of cash for investors that do wish to redeem.

“While some investors are concerned that this level of cash holdings will negatively influence returns, this may not be the case.”

To address the question of whether the saving in time and administration for semi-liquid funds outweighs the potential reduction in returns, Schroders Capital modelled investment returns from private assets under four different fund structures select scenarios:

• Semi-liquid
• Closed-end, liquidity in cash
• Closed-end, liquidity in 5yr Treasuries
• Closed-end, liquidity in MSCI World

“Our modelling shows that the highest cumulative returns come from an investment in the open-ended fund structure followed by the closed-end fund with liquidity held in MSCI World,” Smith says.

“The lowest returns from our model came from a closed-end fund investment with the liquidity held in cash or five year Treasuries.”

Smith says the results are not surprising.

“The manager is constantly managing the investment deal pipeline of the fund to match the liquidity level of the fund. If the cash levels start to increase through new investor subscriptions or monies received from investment exits, the manager may increase the deal pipeline. If liquidity levels reduce because investors redeem or there are fewer exits, the manager may slow down or stop the investment pace,” she says.

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