As the era of “easy money” appears to be over, investors are increasingly seeking to supplement their private equity fund investments by investing on a deal-by-deal basis, the author of this article argues.
The following article is from Victoria McGurran, director of
private client relations at Maven, a UK-based firm that
manages private equity and property. McGurran writes about a
particular aspect of private equity, an asset class that has seen
its fortunes affected in various ways by recent rises in interest
rates, disruption to business sectors by the pandemic,
technologies, and other forces. The editors are pleased to share
these ideas – the usual editorial disclaimers apply to views of
guest contributors. Email tom.burroughes@wealthbriefing.com if
you want to respond.
Looking forward at the start of this year, the investment
landscape is still challenging. Although globally-listed equites
and bonds have enjoyed early-year rallies, buoyed by the prospect
of faster-than-expected interest rate cuts, there is doubt about
how permanent these upturns will be. Commercial property is still
suffering from the “comedown from easy money” as one financial
commentator put it, while residential property markets are still
subdued.
Given this backdrop, it is perhaps no surprise that alternative
investments’ appeal for investors is still strong, along with
private equity which is now a key area for HNW individuals.
Investors are increasingly seeking to supplement their private
equity fund investments by investing on a deal-by-deal basis,
which gives them more flexibility both in terms of the types of
companies they can back and the sort of deal structures in which
they can invest.
Investment case for alternatives still
strong
In the low interest rate, subdued economic climate since the GFC,
investment in alternatives soared as investors, both
institutional and individual, searched for growth assets.
According to Preqin,
the size of the private capital asset funds, essentially
alternatives, under management in Europe almost quadrupled in the
10 years to 2021 with the annual rate of growth rising to over 15
per cent. Even though Preqin expects this to moderate over the
next few years, the firm still forecasts an annual [growth] rate
of around 11 per cent (1).
As investors increasingly plan to construct resilient and durable
portfolios, alternative assets are a key element. Some 96 per
cent of respondents to a recent survey (2), run by a leading
specialist fund manager of UK wealth managers and financial
advisors, last month said that their clients have built up their
allocation to alternative investments. Indeed, 97 per cent of
those surveyed believe that the current economic climate favours
investment in alternative assets.
True, alternatives’ relative investment performance may be
challenged more by, say, listed equity markets, as central bank
interest rate cuts flow through, but the enduring popularity of
alternative assets, such as private equity, is due in part to the
other significant benefits they offer. For instance, they are not
correlated with traditional assets such as listed stocks and
bonds, providing investors with the opportunity to diversify
their portfolio and spread their investment risk as well as
helping to mitigate volatility, potentially improving
risk-adjusted returns.
Certainly, within the alternatives arena, the popularity of
private equity is clear. Typically, HNWs are estimated to hold
between 5 and 10 per cent of their portfolios in private equity.
Among ultra-HNWs, the allocation is even higher. Over 20 per
cent, according to a recent report by family wealth
specialists Campden Wealth, say that they are planning to
increase this allocation (3).
Deal-by-deal approach maximises private equity
potential
Private equity’s investment performance speaks for itself. One
illustration is a study by the US-headquartered Chartered
Alternative Investment Analyst Association (CAIA). Over 21
years, ending in 2021, it showed that private equity
allocations by state pensions produced a 11.0 per cent net-of-fee
annualised return, exceeding by 4.1 per cent the 6.9 per cent
annualised return that otherwise would have been earned by
investing in public stocks (4).
Although the investment case for private equity is strong,
individual investors”, even HNWs’ ability to access private
equity opportunities is not straightforward, as most private
equity funds target institutional investors. However, for
experienced investors, this has been eased considerably by
specialists, such as Maven Capital Partners who offer select
professional investors a deal-by-deal approach to private equity
investing.
A deal-by-deal strategy, although high risk in nature, also has a
number of benefits. Investors benefit from being
able to choose specific investment opportunities that
align with their investment thesis and risk appetite. They are
also able to gain access to a diversified pool of curated
investments, each of which can be considered on their own merits.
It also offers a more nuanced approach to risk management. By
spreading investments across multiple deals, investors can reduce
the impact of any one or more investment on their overall
portfolio performance.
Investors also have greater visibility and control over their
investments. Since each deal is evaluated individually, investors
have access to detailed information about the target company, its
financials, and growth prospects. This, again, empowers investors
to consider each opportunity in turn, rather than simply
investing in a blind pool. Moreover, such a deal-by-deal strategy
is a perfect complement to an existing portfolio that is exposed
to more mainstream retail products such as VCTs.
All this gives deal-by-deal private equity investing the
potential to outperform. By carefully selecting individual
investment opportunities, investors can put their capital in
companies with promising growth prospects and strong potential
for value creation. This targeted approach, combined with active
involvement from co-investment specialists in the portfolio
companies, using their skill, experience, and track record,
provides potential for superior investment performance and higher
returns for investors.
Choosing the right investment specialist is
essential
Although investors have an increased appetite for alternatives, a
recent survey by leading investment platform Shojin revealed that
some 60 per cent of investors find gaining access to
alternative assets difficult (5). Given that these private market
opportunities can be quite recondite, it is therefore critical
that high net worth investors who wish to access private
investments on a deal-by-deal basis choose an experienced
investment specialist who can identify the opportunities suited
to a client’s investment requirements, and with the right
sector knowledge to carry each particular deal to its
maturity. Co-investment specialists established in the private
equity sector are best placed to support high net worth
individuals because they have strong track records in private
equity where co-investment is an extension of such expertise.
The democratisation of private equity is speeding
up. Investors who want to pep up the potential
performance of their portfolios this year should consider
deal-by-deal private equity investing as an
increasigly viable option.
1, https://www.preqin.com/LinkClick.aspx?fileticket=-tGWmjLQdRI%3D&portalid=0
2, New research with financial advisers and investment
professionals reveals the growing importance of alternatives in
client portfolios | TIME Investments (time-investments.com)
3,
https://www.campdenwealth.com/report/ultra-high-net-worth-private-equity-investing-report-2023
5,
https://caia.org/blog/2022/07/20/long-term-private-equity-performance-2000-2021
6,
https://www.ftadviser.com/investments/2022/12/01/third-of-uk-investors-considering-alternative-assets/