The alternative asset class whose time has come

Private investments are increasingly drawing the focus of some of the heaviest hitters of the investment world, including Oaktree Capital, Berkshire Hathaway and, closer to home, the Australian Future Fund (AFF). So it's probably fair to say that PE's time has arrived.

Many of the world's leading capital allocators - such as those mentioned above - have increased their allocation to private investments as their investment processes have evolved. That these investment firms are considered some of the most measured and risk-aware in the industry, given their longevity and strong long-term risk-adjusted returns, makes this even more notable.

Understanding the benefits of investing in private businesses is key to understanding why and how these trends have evolved, as is a deep and objective understanding of the associated risks.

Many investors have historically not considered investing in private businesses due to the perceived risks and therefore may be missing out on the potential for strong risk-adjusted returns over the long term from this asset class.

A mismatch between demand for assets and asset allocation

As of 30 June 2021, self-managed superannuation funds (SMSFs) in Australia had total assets in excess of $822 billion, growing by over $230 billion, or 39% in just 5 years (1).

Furthermore, the total sum of all superannuation savings is estimated to be ~$3.2 trillion (2).

To give this value some context, as of 30 June 2021, the total market capitalisation of every company listed on the ASX was around $2.5 trillion, spread across 2,081 listed entities with tradeable securities (3).

The quantum of funds looking to generate a reasonable risk-adjusted return has increased significantly over the past five years, but we should ask ourselves this question:

Are the asset classes that contain the majority of our invested funds providing us with a greater opportunity set, or have they just increased in value/size?

On review of the asset allocation of SMSFs, we noted that listed shares and property comprise around 43% of all assets. With the inclusion of listed trusts, cash and term deposits, this percentage rises to some 80% of all assets held within SMSFs (4).

SMSF Asset Allocation June Quarter 2021 (5)

Click to enlarge the image

Future Fund: The same, but different

The asset allocation of the AFF, whose stated role is to “generate high, risk-adjusted returns over the long-term”, has an asset allocation fundamentally different to that of SMSFs.

The table below shows the asset allocation breakdown for the AFF portfolio as of 30 June 2021 (6).

Australian Future Fund Asset Allocation – 30 June 2021


The AFF’s allocation of around 41% to property and listed equities is very similar to the asset allocation of SMSFs. However, the makeup of AFF’s 41% allocation is very different compared with the SMSFs allocation.

Only around 6% is allocated to property (globally) and only around 8% to domestic equities, while there is a significant allocation to global equities in both emerging and developed markets (7).

It's more significant that around 18% is allocated to private equities and 7% to infrastructure, which we assume the majority to be via unlisted investments. In other words, around 25% of the AFF asset base is allocated to purely unlisted assets. So, the obvious question is:

Why is there such a significant allocation by our sovereign wealth fund towards private investing?

What do private businesses offer?

Greater opportunity set

With a little over 2,000 listed businesses on the ASX (8), if we then filter by businesses generating between $5 million and $100 million in revenue - what we would class as "emerging" businesses - this opportunity set reduces to 375 companies (9).

Applying our ESG filter and removing mining and energy companies, just 67 businesses that we would consider as truly ‘emerging’ remains.

Industry diversification

One of the most popular reasons for investing in international equities is the diversification it adds to a portfolio, which contrasts sharply with the fundamental lack of industry diversification available via the ASX, particularly in large caps.

The combined market capitalisations of the “Big 4” banks, Macquarie Group and the “Big 3” miners totals around $660 billion, approximately 25% of the total ASX market capitalisation of some $2.5 trillion. It is a well-known fact that ~50% of the ASX-200 is exposed to the financial and materials sectors, as illustrated in the below chart of the ASX-200 by sector (12).

Industry Weighting of the ASX 200 Index (13)


Diversification is a key element to an investor gaining more direct and pure exposure to a specific industry or thematic.

There are currently many thematics vying for investors’ attention, however, the ASX doesn’t necessarily facilitate the desired exposure, unless it is somewhat diluted due to other revenue lines generated by unrelated business activities.

The below pie graph provides a sector breakdown of the 50,000 small privately held businesses (14) with revenues between $2 million and $10 million (15). While this is only a breakdown by the number of companies and the industry classifications do not exactly match those of the ASX breakdown, it is clear to see a far more balanced exposure exists.

Given the sheer quantity of small businesses that operate across the wider economy, this is not surprising. Within this opportunity set, we believe the ability to gain exposure to quality long term tailwinds is vast.

Click to enlarge the image

Source: ATO (16)

Why do companies undertake a listing?

For most people, when they think of a public business, there is a perception that the business must be of a significant scale or has a unique competitive advantage that will propel its growth for many years. But when we look back at some of the largest IPOs in recent years, we believe the opposite is true. 

While some of the proceeds of IPOs are typically used to support growth, this is often a lower proportion than perhaps desired by investors.

We believe the opportunity set for fundraisings within the private business landscape supports a greater skew of capital allocated towards growth, which can have material compounding effects over time.

This is often due to capital being required to take private businesses to the next stage of organic growth when self-funding is no longer viable.

Understanding and demystifying risks of investing in private business

We would argue the two main reasons why investors are somewhat apprehensive before investing in private businesses are:

  1. A lack of high-quality available opportunities either directly or indirectly via a managed fund product, and
  2. The perceived risks associated with investing in private businesses.

Some of the world’s best businesses never go public

Investors today would be quick to recognise numerous companies that are household names, with strong brand recognition which are public businesses such as Google, McDonald's, LVMH Group, Apple and BHP.

However, there are many exceptional global businesses that have never turned to a public market, including:

  • IKEA
  • Patagonia
  • Bloomberg
  • Dyson 
  • Aldi. 

Even in Australia, businesses such as Visy, Meriton, Linfox, Spotlight, Cotton On and Sanitarium have established and grown very successful private businesses. 

And there are others that are lesser-known but present equally compelling investment opportunities, including three that we discuss in our upcoming webinar.


Over the next decade, we firmly believe that the private market landscape will continue to grow at a phenomenal rate and the sophistication of that landscape will continue to evolve.

This should lead to some of the best businesses in Australia (and even globally) remaining private, as the benefits will likely outweigh the positive aspects of running a publicly listed business.

Undoubtedly, being successful in accessing the right private markets - despite, or perhaps because of, the scale of the opportunity set - and allocating capital towards quality businesses will be the most difficult aspect for any investor seeking private investments exposure.

Find out more about opportunities in private markets

For a detailed explanation of how private investments operate, the risks and potential rewards, and insights on a few of the most compelling opportunities in the space, tune in to our upcoming webinar. Join me, Robert Miller and Brendan York for an interactive discussion on Wednesday, 29 September at 11:00am. To register, please click here.

This wire is an extract of NAOS Asset Management whitepaper 'The increasing allocation to Private Market investing'. To access the full paper, click here.


  1. SMSF quarterly statistical report June 2021, https:/ /
  2. Superannuation Statistics. Super Statistics - ASFA (
  3. SMSF quarterly statistical report June 2021, https:/ /
  4. Historical market statistics. Historical market statistics (
  5. Self Managed Superannuation Funds - SMSF quarterly statistical report June 2021 -
  6. Portfolio Update at 30 June 2021 Future Fund | Portfolio updates
  7. SMSF quarterly statistical report June 2021, (VIEW LINK)
  8. Historical market statistics. Historical market statistics (
  9. FactSet Screening Data, 2021.
  10. Excludes businesses with a ‘non-taxable’ status
  11. ATO Business Statistics Company statistics | Australian Taxation Office (
  12. S&P/ASX 200 Industries Sector Breakdown S&P/ASX 200 Index Details, Companies and Stocks List by Industry and Sectors - Stock Metric
  13. S&P ASX 200 Index Breakdown Index Finder | S&P Dow Jones Indices (
  14. Excludes businesses with a ‘non-taxable’ status
  15. ATO Business Statistics Taxation Statistics 2018-19 - Snapshot - Table 5 -
  16. ATO Business Statistics Taxation Statistics 2018-19 - Snapshot - Table 5 -
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Sebastian Evans is the Managing Director and Chief Investment Officer of NAOS Asset Management Limited. Sebastian is the major shareholder of Naos and has worked in the firm for over 13 years. Sebastian has a Bachelors Degree in Commerce Majoring...

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