Stockholm (HedgeNordic) – Access to private markets asset classes such as private equity or private credit is becoming increasingly available to individual investors, expanding beyond the traditional reach of institutional and ultra-wealthy clients. Individual investors are also showing growing interest in diversifying into private markets. Responding to this demand, Alexandria Group, a private wealth manager and asset manager with around 40,000 clients in Finland, has launched a fund that invests in semi-liquid private equity and private credit funds.

“There had been interest from both our sales force and clients regarding private equity and private debt,” states Toni Iivonen, the CIO of Alexandria Group and CEO of its fund management arm, providing context for the fund’s launch. “In the past two to three years, we have also observed a surge in product launches from both smaller and larger asset managers offering similar solutions,” he elaborates. The recent changes in regulations under the modernized ELTIF 2.0 and UCI Part II regime have simplified access for retail investors, effectively lowering barriers to retail participation in private market investments.

“The biggest challenge for private clients in accessing private equity and private debt has been the illiquidity of these asset classes.”

Toni Iivonen, CIO of Alexandria Group and CEO of its fund management arm.

However, Iivonen notes that “the biggest challenge for private clients in accessing private equity and private debt has been the illiquidity of these asset classes.” While these semi-liquid structures do not completely address the liquidity mismatch between private markets and the liquidity of the funds, “they significantly alleviate this concern for many clients.” Alexandria employs a Finnish fund structure akin to the Luxembourg UCI Part II regime, allowing for quarterly redemptions and monthly subscriptions. The underlying investments consist of semi-liquid private equity and credit funds “that share similar liquidity profiles with our fund.”

Consolidated Exposure to Private Equity and Private Credit

Rather than offering separate funds for private equity and private credit, Alexandria provides combined exposure to both asset classes in a single fund. “There are correlation and diversification benefits when including both private equity and private credit in one vehicle,” explains Iivonen. “Private credit typically performs well in a rising rate environment, while private equity may do better in other conditions,” he elaborates. “At the same time, private credit usually exhibits shorter duration than private equity, which improves the fund’s overall liquidity profile.” Thus, the exposures to private equity and credit complement each other within a unified portfolio.

“There are correlation and diversification benefits when including both private equity and private credit in one vehicle. Private credit typically performs well in a rising rate environment, while private equity may do better in other conditions.”

Toni Iivonen, CIO of Alexandria Group and CEO of its fund management arm.

Alexandria’s fund targets an allocation of approximately 80 percent to private equity, with the remainder directed toward private credit, although this allocation can fluctuate based on market conditions. “The allocation could also shift to 60 percent private equity and 40 percent private credit; there are no strict limits,” says Iivonen. “We take a common-sense approach to adjusting our exposure.”

The private equity market has faced headwinds from rising interest rates, resulting in fewer exits and M&A transactions. However, Iivonen anticipates that as interest rates decline, M&A activity will rebound, revitalizing the private equity market. Despite decreasing interest rates, Iivonen expects the private debt and credit market to remain appealing. “While private credit may experience some impact from lower rates, this change is unlikely to significantly affect returns due to the high coupon nature of private credit,” he asserts, unless a zero-rate environment returns. “However, I do not foresee rates dropping to zero, even with many cuts priced into the current interest rate curve.”

Given the crowded private equity market and the anticipated uptick in transactions, Iivonen also expects “a rise in fundraising for private credit managers.” Overall, he expresses a positive outlook for both private equity and private credit in the current environment.

Pathway to Private Assets via Established Managers

To facilitate access to private equity and credit for its extensive investor base across Finland, Alexandria has adopted a prudent approach to portfolio construction. “We are building our portfolio by investing in and partnering with funds that have a proven track record, significant assets under management, and stable, mature portfolios with diversified vintages,” explains Iivonen, the CEO of the group that oversees €2 billion in assets under management. Among the fund’s current investments are Partners Group Global Value SICAV and Schroders Capital Semi-Liquid Global Private Equity, both of which boast long-standing records and sizable, mature portfolios of private equity investments.

“We are building our portfolio by investing in and partnering with funds that have a proven track record, significant assets under management, and stable, mature portfolios with diversified vintages.”

Toni Iivonen, CIO of Alexandria Group and CEO of its fund management arm.

As Alexandria’s fund grows, the portfolio is expected to expand to between five and 15 funds. “Down the road when we reach a higher level of assets under management, we intend to diversify the allocation further and may consider investing in funds with a shorter track record,” notes Iivonen. At this stage, however, the emphasis remains on larger, more experienced managers. “We have evaluated many different aspects as part of the due diligence process, including the usual things such as track record, consistency, performance across different market conditions, available resources, and risk management tools.”

Iivonen concludes by discussing the primary motivations driving investor interest in private equity and private credit, namely higher return potential and diversification compared to public markets. “Return-wise, private equity and private credit appear quite attractive when compared to public equity and debt markets,” says Iivonen. “Moreover, they serve as a diversifying element within a portfolio; for example, private equity valuations tend to be less volatile than those in public markets.”

Investing in private equity and private credit comes with challenges, such as the J-curve associated with the long periods for the capital calls, extended investment horizons, and limited liquidity. “Some of these issues are mitigated by the semi-liquid fund structure, which is evergreen and fully invested,” according to Iivonen, providing a pathway to private markets for individual investors.