Understanding the Risks of Private Market Investments
At our company, we offer private market investments as part of our portfolio options. These investments are managed by third-party investment managers who have been carefully selected by our investment committee for their track record, strategy, and diversification benefits within a broader portfolio. However, it's important to note that private market investments come with a higher level of risk compared to traditional investments. In this article, we'll discuss the potential risks involved in private market investments and why it's crucial to understand them before investing.
Regulation and Custody of Funds
When you invest in private market investments through our company, your funds will be handled by our custodian, who is regulated by the Financial Conduct Authority (FCA). This means that your investments are held and managed by a trusted and regulated entity, providing an added layer of security for your funds.
Illiquidity and High Risk
One of the main characteristics of private market investments is their illiquid nature, meaning they cannot be easily bought and sold. This is in contrast to traditional investments, such as stocks and bonds, which can be bought and sold on a public exchange. The FCA recognizes private market investments as high-risk investments, which means there is a higher chance of losing some or all of your money.
Potential Risks Involved
It's essential to be transparent about the potential risks involved in private market investments. These risks can include:
1. Volatility Risk:
Investments can go up and down in value, and there's no guarantee you'll get back what you initially put in.
2. Liquidity Risk:
It might be hard to quickly buy or sell certain investments in the Fund, especially if they involve private credit assets.
3. Interest Rate Risk:
When interest rates go up, the value of bonds tends to go down.
4. Credit Risk of Underlying Issuers/Lenders:
If the companies or institutions that issued the bonds or loans in the Fund run into financial trouble, the value of those bonds or loans can drop or even become worthless.
5. Currency Risk:
The Fund deals with different currencies, and changes in exchange rates can lead to losses.
6. Counterparty Risk:
If the parties the Fund deals with in various agreements can't fulfil their commitments, it could result in losses for the Fund.
7. Derivatives Risk:
Sometimes derivatives don't perform as expected and can lead to losses that are greater than the cost of using them.
8. Concentration Risk:
The Fund might focus heavily on a few geographic areas, industries, or specific investments. This can lead to significant changes in the Fund's value, either up or down, which could affect its performance.
9. Gearing Risk:
The Fund might borrow money to make more investments. This can boost returns if the investments do well, but it can also reduce returns if they don't.
10. Valuation Risk:
The pricing of private credit assets can be uncertain, and for property-based investments, the value often depends on the opinion of a valuer.
11. Industry/Country Risk:
Changes in laws, economic conditions, and competition can impact investment values. There's also the added risk of social and political uncertainty and natural disasters.
12. Infrastructure Asset Risk:
Infrastructure investments come with extra risks related to construction (like delays and cost overruns) and deploying capital over time rather than upfront.
Why Understanding Risks is Crucial
It's crucial to understand these risks before investing in private market investments. These risks can significantly impact your financial outcomes, and it's essential to be aware of them to make informed investment decisions. We recommend consulting with a financial advisor to assess your risk tolerance and determine if private market investments are suitable for your investment goals.
At Prosper, we strive to provide transparent and comprehensive information about our investment options. We want our clients to make informed decisions and understand the potential risks involved in their investments. If you have any further questions or concerns about private market investments, please don't hesitate to reach out to our customer support team at [email protected].
Remember, investing in private markets can offer high potential returns, but it also comes with a higher level of risk. By understanding these risks, you can make informed decisions and potentially achieve your investment goals. Thank you for choosing our company for your investment needs. Capital at risk.