Alternative assets comprise a broad range of investments (including private market assets) that differ from traditional assets such as listed stocks and bonds. SFC-authorised listed closed-ended alternative asset funds (LAFs) typically invest in private market assets, such as private equity and private credit, which are generally illiquid, more opaque and difficult to value.

This is the most common type of private market assets, involving investments in equity of private companies that are not listed on public stock exchanges.

Private equity is a long-term investment that, depending on the strategy of a particular fund, may aim to create value sustainably through active management and an entrepreneurial approach.

Private companies encompass a broad range of industries and stages of development, from emerging start-ups to established companies. Some private equity investors (such as funds and institutional investors) may take an active role in managing and operating these companies after acquiring their equity or ownership. Their goal is to drive growth and boost profitability. If the company’s value is increased, private equity investors typically seek to exit their investment and realise a return by taking the company public or selling their equity in the company. Nevertheless, start-ups usually face a very high failure rate due to various factors such as insufficient market demand or flawed business models. The value of such investments may be impacted negatively, or even written-off completely. Investors may suffer significant losses. As a result, investors should exercise caution when considering funds investing in private equity.

Private credit broadly describes loans extended to private companies. The primary feature of private credit is that the lenders are not traditional banks, and the borrowers are typically companies that do not have, or have limited, access to bank loans and public corporate bond markets.

Private credit lending strategies are diverse. For example, lending money to companies directly or indirectly, without involving traditional banks. These companies may be experiencing financial distress or undergoing restructuring.

Private credit may also involve lending to companies involved in infrastructure projects to finance the development, construction, operation and maintenance of essential infrastructure projects such as toll roads, power generation, transportation, utilities and data centers.

Different private credit lending strategies have specific purposes, target borrowers, and terms and conditions (such as interest rates, terms, seniority, and protective covenants), resulting in varying risk and return profiles.

Depending on the strategy and the types of private credit investments, the default rate of the underlying loans could be high. LAFs investing in private credit may not be able to get back the principals and interests in full and may suffer significant losses. As a result, investors should exercise caution when considering private credit funds.

Private investments are complex in nature. Investment in LAFs involves significant risks and investors may lose a significant portion or all of their investments. Investors should pay attention to all risks relevant to their particular investments, including the following key risks:

• Low Liquidity
  Private equity and private credit generally lack an active and open secondary market, resulting in low liquidity. These investments may take a long time to sell, or they can only be sold at a substantial discount, so investors may suffer significant losses.

• Valuation Challenges
  Liquid assets are generally valued based on observable market prices. In contrast, private illiquid assets may not have directly observable market prices. Valuations of these assets are primarily based on assumptions and valuation models, which may be subjective, non-transparent and inaccurate.

• Opacity in Private Markets
  Since private market assets are generally not obligated to publicly disclose information such as financial information or risk factors, the transparency in the private market is relatively lower than in the public market. There may also be substantial information asymmetry between investors and the fund managers and investors may not be able to make well-informed investment decisions.

LAFs offer investors a channel to access private market assets. However, due to the nature and risks of private investments, these funds are suitable only for investors with a long-term outlook, who understand the nature and risks of investing in illiquid assets, have the relevant knowledge, and can bear potential losses. Prior to investing in the fund, investors should review all offering documents carefully to understand the fund’s features, particularly its investment strategy and associated risks; and seek independent professional advice if in doubt.