Democratisation of financial markets

During the decade before the pandemic (more precisely, until mid-2019), private equity funds, i.e., those that invest in non-public companies, achieved an average rate of return of more than 15% - as per the calculations by Josha Lerner from Harvard and the consulting company Bain & Co.

The above means that PE funds were among the most profitable classes of assets in the world during that period. It was possible to achieve slightly higher rates of return on Wall Street but much lower on other major stock markets. However, over a 20-year horizon, PE funds had no competition. Unfortunately, typically, only large institutional investors who are able to freeze multi-million amounts for several years, had access to the private market. The trend has been changing lately, which is one of the manifestations of a broader phenomenon: the democratisation of the capital market.

The above was one of the topics of the debate during the Economic Forum in Karpacz "Investing in capital markets in a period of increased uncertainty - how do the best do it?".

- The private equity funds are typically addressed to institutional investors because they require a commitment of large sums of money for relatively long periods of time. The most important clients are American and Canadian pension funds, national investment funds of the richest countries or large insurance companies. There has been an innovation observed in the industry for several years - entities (such as Moonfare) allow retail investors to invest relatively small amounts of capital and then entrust an already significant pool to PE funds. Consequently, the latter become available to everyone - explained in Karpacz Krzysztof Krawczyk, a partner of a global fund CVC Capital Partners.

However, as Krzysztof Krawczyk stressed, for some companies that manage PE funds, especially smaller ones, the high interest of investors may also be a trap. - According to conducted research, for example by prof. Lerner from Harvard, when managers of funds have too much money at their disposal, they may start to act in a less disciplined way which may lower rates of return in the long run - said the representative of CVC that owns, i.a., PKP Energetyka and a chain of convenience stores Żabka in Poland.

Another sign of democratisation of the market is the increasingly easy access to foreign stock exchanges, as pointed out by Jacek Chwedoruk, the managing director of Rotschild & Co in Poland.

- We have had 11 debuts in Warsaw this year (on the main exchange market - ed.), only two in Prague and one in Bratislava. That is not enough for investors to have the right number of attractive companies to choose from. However, young investors are aware of what to do: they open accounts that give access to foreign stock markets, said Jacek Chwedoruk.

Some data from the investment company BlackRock were also presented by Jacek Chwedoruk, according to which real estate was one of the most profitable classes of assets in the past decade but only if money was invested via the so-called REITs, i.e., funds that pay regular dividends. Unfortunately, in Poland, works on an act that would enable the creation of such funds have been going on for several years. - REITs are characterised by a diversified portfolio and do not apply as high leverage as it is often done by individual investors. In that way, the rate of return and the safety of investments is improved - persuaded Michał Sapota, the president of HRE Investments, adding that he hoped that REITs would soon be available also in Poland.

Democratisation of the capital market facilitates diversification of portfolio which - according to experts - is the key to successful investing. The importance of diversification has increased lately even more, due to increased uncertainty. - In such uncertain times, with high volatility, I would recommend dividing savings into five parts: 20% should be invested in private equity funds, 20% in real estate, 20% in shares and 20% in bonds. The remaining 20% could be spent on something we enjoy. The capital market is shaped by emotions, it is us, its participants, who change it - said Anna Milewska, the president of Skarbiec TFI.

According to Anna Milewska, investing in the classes of assets that have done well in the recent past is a worrying phenomenon. Meanwhile, high historical rates of return are no guarantee that the future rates will be the same, especially in the near future. - If someone wants to invest in the class of assets which has recently achieved a high rate of return, that person should at least be patient and assume a longer investment horizon, of more than three months, explained Milewska. In turn, Marcin Żółtek, the vice-president of TFI PZU, recommended not to follow market fashions blindly.

- Many companies present themselves to investors as green, following ESG principles, or as technological ones. High liquidity in the markets is conducive to the increase of prices of shares of those entities. However, when central banks start to reduce that liquidity, many of them will face repricing. Therefore, it is important to identify companies that are actually green and support digitisation - argued Marcin Żółtek. - Digitisation has to be justified by a business case because only then it will allow for a comprehensive change in an operating philosophy of a company. Inspiration through meetings and discussions with leading partners in key global technology centres, such as Silicon Valley, Singapore or Israel, is something that we always start from when cooperating with our companies - noted Krzysztof Krawczyk.