UniFi by CAIA Crossing the Threshold - 33

Articulating Merits of Investing Outside Public Markets
Notwithstanding the increased efficiency in the public markets that has resulted
from greater transparency (in part due to regulation) and product innovation, many
investors believe that what is available at the underlying asset level in the public
markets is appropriately inclusive to capture their desired rate of return.
One way to overcome this perception is to position private markets exposure
alongside public markets exposures; as an example, private debt as an extension
or complement to debt strategies that are publicly traded, or a private equity
portfolio company as a steppingstone to becoming either an acquisition target of
a listed company or a listed company on its own. By removing the imaginary line
between private and public markets, investors begin to conceptualize their allocation
to " alternatives " instead as exposures that are an important part of the overall
construction.
Addressing Cost Concerns
Over the past 15 years, a combination of increasing availability of tax-and fee-efficient
structures in the public markets, a period of low growth and interest rates, and a
decrease in alpha due to low dispersion amongst public securities has decreased
the desire to pay higher fees and taxes. Acknowledging the potential for the drag on
returns that higher fees and taxes could produce, as well as describing in detail why
they are justified and/or necessary to achieve potentially higher returns, is the key.
For example, advisors should take the time to describe how the effort taken to unlock
differentiated sources of return requires specialized, proprietary resources that may
demand a higher fee structure. Regarding taxes, an emphasis on asset location for
individuals and families can help dampen the impact of strategies that generate
meaningful taxable income. In short, a thoughtful comparison of after-tax and netof-fee
return expectations is always a good starting point when thinking about
reallocating from public to private market exposures.
Navigating Illiquidity Preferences
One needs to accept that the starting point for most investors is the preference
for liquidity over illiquidity, all else equal. By investing in less liquid assets and fund
structures, advisors transfer the optionality of exiting that investment from their client
to the portfolio manager. This can be an area of conflict, and attempting to overcome
this objection by presenting academic research that shows the history of individual
investors' bad decision-making is generally not very effective. Instead, illiquidity
should be touted as a tool for an investment; as fund managers seek to maximize the
return of any given investment, illiquidity puts time on their side.
This also speaks to the need to align the structure and liquidity characteristics of
a particular strategy with the underlying assets. It can be difficult for investors to
reconcile investing in a strategy that offers limited liquidity but invests in highly liquid
positions; it is also important to caution investors about the risks of investing in liquid
structures without the appropriate level of underlying asset liquidity. Simply, illiquidity
is a cost in that it limits the end investor from investing elsewhere and therefore, it is
imperative that investors understand the potential compensation for that tradeoff.
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UniFi by CAIA Crossing the Threshold

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