High-net-worth (HNW) investors are doubling down on private equity, and the current economic environment is the perfect breeding ground for private companies to attract capital.
HNW investors have always been attracted to taking ownership stakes in private companies (private equity) for a variety of factors:
- In the hands of the right management team, private equity promises higher returns than public options.
- Private equity is uncorrelated to the broader markets due to illiquidity due to long lockup periods – providing recession-resistant returns.
- Private equity funds involved in productive businesses provide investors both cash flow as well as appreciation.
- The partnership entity structure of private equity offers significant tax benefits in the form of pass-through deductions, capital gains treatment, and exemption from self-employment taxes.
- Private equity funds invested in essential assets are ideal buffers against inflation where demand keeps pace with rising prices.
- True diversification can be accomplished across multiple asset classes and geographic locations – insulating cash flow and growth in a way not possible with public options. If the stock market goes, so do all the individual stocks, no matter how diversified you think you are.
In today’s shaky economic environment – highlighted by overvalued stock and crypto markets and rising prices – HNW investors are opting more for private investment over public options.
That’s because the private markets offer protection against the two portfolio killers that public equity offers no protection against:
It’s not just HNW investors doubling down on private equity. Discovering the benefits of private investments for themselves, more and more qualified investors are increasingly choosing private equity over public investments.
This is due to the relaxation of advertisement rules and the expansion of the definition of an Accredited Investor by the SEC. This has had the effect of drawing more attention to private opportunities and allowing a higher number of investors to qualify to participate in these offerings.
One important result from these developments in the private markets occurred in 2019 when private offerings overtook registered offerings in the amount of capital invested by the investing public. Over $1.5 trillion was reportedly raised through private offerings under exemptions under Regulation D compared to $1.2 trillion through IPOs.
Recent fintech developments have also increased interest in private investments. Attracting, screening and onboarding new investors have become increasingly easier and cost-effective for private companies seeking capital.
High prohibitive buy-ins and long lockdown periods used to be deterrents for many HNW investors. Still, with recent fintech developments and the proliferation of online platforms, more and more investments are becoming available with lower buy-ins and shorter lockup periods – leading to increased interest by HNW investors.
On the investor side, the exponential increase in the quantity and quality of private investment choices has led to enormous amounts of capital being reallocated from the public to the private markets. Based on a recent report by GlobalData, HNW investors are already allocating 3.4% of their portfolios to private equity. This year, that figure is projected to rise to 4.4%.
Also, in the report by GlobalData, private alternatives giant Blackrock reported that private alternatives have more than tripled since 2007, increasing from $2.5trn to $8trn, with private equity driving most of that growth. Over the past decade, private equity assets have increased at a compound annual growth rate (CAGR) of 11%. GlobalData’s outlook is for private equity to continue its growth trajectory at a CAGR of 7.4% over the period from 2019 to 2024.
HNW investors have always been interested in private equity. Still, that interest has intensified recently, with many HNW investors bracing for a stock market correction and inflation to heat up. Low-interest rates in the fixed assets have further alienated HNW investors from the public markets.
Dissatisfied with yields on public debt and leery of public equity volatility, HNW investors are going against the investing grain and doubling down on private equity.
Achieving HNW status in part to going against the grain, HNW investors are skilled at gauging the investment landscape. It would benefit non-HNW investors to start paying more attention to what HNW investors are doing.