Private equity provides an opportunity to pursue higher returns and greater diversification than may be available through the public markets alone.
Private equity provides an opportunity to pursue higher returns and greater diversification than may be available through the public markets alone. New technologies are now making it possible for high-net-worth investors and their closest advisors to access certain alternative investments that have previously only been available to the largest and most sophisticated institutional investors. Below are four key reasons why private equity can make sense as part of a thoughtful, long-term investment strategy.
Private equity has historically outperformed public markets and almost all major asset classes over the 10, 15 and 20-year periods. Private equity’s longer-term investment horizon creates an opportunity for managers to implement transformational growth plans and operational improvements that often would be difficult in a public market context, and can result in potentially better returns in exchange for the illiquidity risk. In 2014, the capital distributed to investors from private equity buyout funds surpassed $450 billion, an all-time high for the asset class.1
While traditional managers are limited to investing in the public markets, private equity managers can invest in a much broader universe of companies that may provide access to little-known or exclusive investment opportunities and potentially valuable diversification benefits that are not available elsewhere. For instance, in the United States alone there are nearly 135,000 private companies with revenue between $25 million and $1 billion companies, compared to approximately 5,000 publicly listed companies of the same size.3
Private investments have distinct characteristics that can complement a portfolio heavily weighted toward public equities and fixed income. Some of these qualities - particularly a manager’s ability to access meaningful information about a potential investment and the degree of control and influence a manager can exert over an investment - can help private equity firms deliver returns that are notably different from public market indices.
A variety of factors have strengthened the alignment of financial interests between private equity firms and investors. Typically, managers commit their own capital to funds alongside external investors and cannot take a profit until specific pre-determined performance hurdles have been met. In essence, the better a fund’s performance is, the greater the return will be to both the investors and the fund managers.
While private equity funds provide the potential for attractive returns, they also have features and risks not typically present in public equity markets, including, but not limited to:
• Investment will be illiquid for a period of time, which means it cannot be sold, transferred or redeemed at will or for reasons of hardship
• The manager’s investment strategy may not be fully or successfully implemented as intended
• There may be significant execution and operating risks that could negatively impact the fund and its investors
• Part or all of the principal investment may be at risk or lost
• Past performance is not an indication of future results
(1) Source: Bain & Company, Global Private Equity Report 2015.
(2) Source: Cambridge Associates, March 31, 2017. Past performance is not indicative of future results. Historical returns are included solely for the purpose of providing information regarding private equity industry returns and returns of other asset classes over certain time periods. While investments in private equity funds provide potential for attractive returns, they also present significant risks not typically present in public equity markets, including, but not limited to, illiquidity, long term horizons, loss of capital and significant execution and operating risks.
(3) Source: Hoovers, March 6, 2015, excludes Forestry; Mining; Depository Institutions; Security and Commodity Brokers, Dealers, Exchanges, and Services; Holding and other Investment Offices; Museums, Art Galleries, and Botanical and Zoological Gardens; Private Households; Public Administration. There were 5,008 listed companies in the US at the end of 2013 according to the World Federation of Exchanges.
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Past performance is not indicative of future results. All of the products described are private placements that are sold only to qualified clients through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described may involve long lock-ups and do not provide investors with liquidity.
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