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The authors of this article argue that the era of “easy money” appears to be over, with investors increasingly looking to supplement their investments in private equity funds by investing on a deal-by-die basis.
The following article is by Victoria McGurran, Director of Private Client Relations at Maven, a UK-based private equity and real estate management firm. McGarlan writes about specific aspects of private equity, an asset class whose fortunes have been affected in a variety of ways by recent interest rate increases, pandemic-induced disruption to the business sector, technology and other factors. . Our editors will be happy to share these ideas. The usual editorial disclaimers apply to guest contributor views. If you would like to respond, please email tom.burroughes@wealthbriefing.com.
Looking ahead to the beginning of this year, the investment environment remains challenging. Globally listed stocks and bonds have enjoyed gains to start the year, buoyed by the prospect of earlier-than-expected interest rate cuts, but there are questions about how permanent these gains will be. Commercial real estate is still suffering from the “backlash from easy money,” as one financial commentator puts it, while the residential real estate market remains depressed.
Given this background, it is perhaps not surprising that alternative investments continue to have a strong appeal for investors, similar to private equity, which is now an important area for the wealthy. Probably. Investors are increasingly looking to supplement their investments in private equity funds by investing on a deal-by-deal basis, making them more attractive both in terms of the types of companies they can support and the types of deal structures they can invest in. It gives you flexibility.
The case for investing in substitutes remains strong
Amid the economic downturn with interest rates at the lowest since the global financial crisis, investment in alternatives has surged as institutional and individual investors seek growth assets. Prekin said the size of essentially alternative private capital asset funds operating in Europe almost quadrupled in the decade to 2021, with annual growth rising to more than 15%. That’s what it means. Although Preqin expects this situation to ease over the next few years, the company still expects annual sales. [growth] The proportion is approximately 11 percent (1).
Alternative assets have become a key component as investors increasingly plan to build resilient and durable portfolios. In a recent survey of UK wealth managers and financial advisors conducted last month by a leading specialist fund manager (2), around 96% of respondents said their clients were increasing their allocations to alternative investments. In fact, 97 percent of those surveyed believe that the current economic climate favors investing in alternative assets.
Indeed, the relative investment performance of alternative assets may be further challenged by, for example, public equity markets due to central bank interest rate cuts, but the enduring popularity of alternative assets such as private equity is partially due to This is due to other important advantages. they suggest. For example, they are uncorrelated with traditional assets such as listed stocks and bonds, providing investors with the opportunity to diversify their portfolios and spread investment risk, as well as helping to mitigate volatility and risk adjustment. May improve later returns.
Indeed, the popularity of private equity in the alternatives space is clear. It is estimated that wealthy individuals typically hold between 5 and 10 percent of their portfolios in private equity.
Among the ultra-wealthy, the allocation is even higher. More than 20 percent say they plan to increase this allocation, according to a recent report by family wealth experts Camden Wealth (3).
Maximize your private equity potential with a deal-by-deal approach
Private equity investment performance speaks for itself. One example is a study by the U.S.-based Chartered Association of Alternative Investment Analysts (CAIA). Over the 21 years to 2021, the National Pension’s allocation to private equity generated an annualized return of 11.0% net of fees, 4.1% higher than the 6.9% annualized return the investment would have otherwise earned. It was shown that Public stock (4).
Although the investment case for private equity is strong, accessing private equity opportunities may not be easy even for high-net-worth individuals, as most private equity funds target institutional investors rather than individual investors. there is no. However, for experienced investors, this is considerably mitigated by experts. and Maven Capital Partners, which offers a deal-by-deal approach to private equity investing to select professional investors.
Although deal-by-deal strategies are inherently risky, they also have many benefits. Investors benefit from being able to select specific investment opportunities that match their investment thesis and risk appetite. You also have access to a diverse pool of carefully selected investments that you can consider based on their merits. It also provides a more nuanced approach to risk management. By spreading investments across multiple trades, an investor can reduce the impact of one or more of her investments on the overall portfolio performance.
Investors also have greater visibility and control over their investments. Each deal is evaluated individually, giving investors access to detailed information about the target company, its financial health and growth prospects. This allows investors to consider each opportunity in turn, rather than simply investing in a blind pool. Additionally, such a deal-by-deal strategy perfectly complements existing portfolios exposed to more mainstream retail products such as VCTs.
All of this creates the potential for deal-by-deal private equity investments to outperform. By carefully selecting individual investment opportunities, investors can put their money into companies with promising growth prospects and high value creation potential. This targeted approach, combined with the active involvement of co-investment specialists in portfolio companies leveraging their skills, experience and track record, provides investors with the potential for superior investment performance and higher returns. Masu.
Choosing the right investment specialist is important
Investor appetite for alternatives is growing, but a recent survey by leading investment platform Shojin revealed that around 60 per cent of investors find it difficult to gain access to alternative assets. It was (5). Given that these private market opportunities can be highly uncertain, high-net-worth investors who wish to access private investments on a deal-by-die basis can identify opportunities that suit their client’s investment requirements. It is important to choose an experienced investment professional who can. , and have the appropriate sector knowledge to carry each specific trade to maturity. Co-investment specialists established in the private equity field are ideally suited to support high net worth individuals as they have an excellent track record in the private equity field where co-investment is an extension of such expertise.
The democratization of private equity is accelerating. Investors looking to further enhance the performance potential of their portfolios this year should consider deal-by-deal private equity investing as an increasingly viable option.
1, https://www.preqin.com/LinkClick.aspx?fileticket=-tGWmjLQdRI%3D&portalid=0
2. New research by financial advisors and investment professionals reveals the growing importance of alternatives in clients’ 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/
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