There is one alternative allocation that has been in endowments, foundations, and high net-worth families for a long time. It is also usually the largest allocation in these portfolios and this investment is private equity. I use the movie Pretty Woman and the character Richard Gere played when explaining private equity to our clients. To refresh your memory, he ran a private equity firm that bought companies and put them together or bought companies and took them apart. It’s a simple explanation, but it gets the “gist” of one element of what private equity is.
For those that aren’t Pretty Woman fans, per Investopedia “private equity is ownership or interest in an entity that is not publicly listed or traded. A source of investment capital, private equity comes from firms that purchase stakes in private companies or acquire control of public companies with plans to take them private and delist them from stock exchanges”.
Private equity has become an increasingly popular investment option for institutional investors, family offices, and high-net-worth individuals over the past decade. This is because private equity investments can offer potentially high returns, diversification benefits, and access to companies that are not publicly traded. However, investing in private equity can also be complicated and time-consuming which is why many investors have turned to private equity funds of funds as a way to gain exposure to the asset class.
Direct Private Equity
Direct private equity is investing directly into a private company. Most people don’t have this access so there are companies that provide it and source the individual companies. Investors then get a piece of multiple private firms over a 6-12-month window.
Private Equity Fund of Funds
Private equity fund of funds is a pooled investment vehicle that invests in multiple private equity funds rather than investing directly in private companies. By doing so, it provides investors with exposure to a diversified portfolio of these investments; this can help to mitigate risk and increase the likelihood of achieving attractive returns. One benefit of investing is it provides investors with access to a broader range of private equity funds than they would have access to on their own. This is because many have high minimum investment requirements that are out of reach for all but the wealthiest investors.
By pooling investors’ capital, a private equity fund of funds can meet these minimum investment requirements and gain access to a broader range of private equity funds. Private equity funds of funds have a track record of outperforming traditional asset classes over the long term. According to a report by Cambridge Associates, private equity funds of funds outperformed the S&P 500 by an average of 4.4 percent per year over the past 20 years. This outperformance is due in part to the diversification benefits that funds of funds provide. By investing in a diversified portfolio of private equity funds, investors can reduce the risk of their portfolio and potentially achieve higher returns.
Private Equity is Becoming More Accessible.
In the past, private equity was primarily exclusively the domain of institutional investors and ultra-high-net-worth individuals. However, as the private equity industry has grown, it has become more accessible to a broader range of investors.
Private equity funds of funds are one way that investors can gain exposure to the asset class without having to meet the high minimum investment requirements of many private equity funds.
Private Companies Are Staying Private Longer.
Another trend that is making private equity an attractive investment option is private companies are staying private longer. Previously, companies would go public after a few years of growth to raise capital to fund further expansion. However, today many companies are choosing to stay private longer, which means investors who want to gain exposure to these companies may need to do so through private equity. By investing in private equity fund of funds, investors can gain exposure to a diversified portfolio of private companies that may not be available through other investment vehicles. Private equity can provide growth and stability to a traditional stock portfolio.
The Current Financial Environment
As the current financial environment continues to be uncertain, private equity offers a level of security and stability that public investments cannot. It can insulate you from most of the stock market risk, not all, but it can give you equity-like returns not correlated with the public market. For most investors, they will never be in a position to buy into private equity directly (most have multi-million minimums) but for accredited investors, they can consider private equity fund of funds with much lower minimums, usually $50K-$100K. Happy hunting!!!
Read more at Forbes.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
Frederick Hubler is the founder and CEO of Creative Capital Wealth Management Group, a retainer-based wealth strategy firm specializing in alternative strategies located in Chester County.