Private Equity: The Long-Term Strategy

The uncertainty and volatility of the public markets have generated significant recent interest from individual investors seeking shelter from the storm. Specifically, investors seek investments in private companies (i.e., private equity) for above-market returns.

It’s no secret that institutional investors have always been attracted to private equity for above-market risk-adjusted returns. In fact, over the past quarter century, there has been a marked shift in U.S. equities from public markets to private markets controlled by venture capital firms. However, because of recent efforts by the SEC and outreach efforts by private companies, individual investors are now being attracted in droves to this segment.

Why the interest in private equity?

The SEC has given insight into the benefits of private equity and private market investing, and in a speech given in 2020 at the PLI Investment Management Institute, Dalia Blass, the Director of the Division of Investment Management at the SEC, suggested that Main Street investors need more access to private markets.

So why the big push towards private markets? Ms. Blass put it best:

“Private investments have the potential to provide stronger returns and diversification for investors…”

The recent stock market volatility and collapse of the crypto markets have investors looking beyond liquid investments based on timing and speculation to long-term illiquid options insulated from volatility. Perhaps that’s why there’s been increased interest in private equity from individuals seeking above-average risk-adjusted returns with a smoother ride in short periods when the broader market seems to lose its way.

“Private equity can help generate long-term capital growth and keep investors invested through market downturns,” says Scott Reeder, head of the alternative investment team for BlackRock’s U.S. Wealth Advisory business.

BlackRock’s projections back up its confidence in private equity over other asset classes. Over the next ten years, BlackRock’s central expected return for private equity as an asset class is 11.2%. For the same period, BlackRock anticipates a return of 8.8% for U.S. equities and an 8% return for a global, balanced allocation of 60% stocks and 40% bonds.

Top university endowments have also turned to private equity for above-market long-term returns. In recent decades some of the country’s richest university endowments have moved their asset allocation toward private markets in search of higher returns.

For example, Yale University’s endowment, run by its then-chief investment officer David Swensen who took over in 1985, has delivered excellent long-term returns and is considered a pioneer in asset allocation. When Swensen took the helm in the mid-1980s, about 65 percent of the portfolio was allocated to U.S. equities, 15 percent to U.S. bonds, and none to private equity. Today, U.S. equities, bonds, and cash are less than 10 percent of the endowment’s target asset allocation.

There is plenty of data to back up private equity’s prowess. A 2019 study by Cambridge Associates (“CA”), a private investment firm, reinforces the value of private investments in an investment mix. The CA study found that private investments have provided the strongest relative returns for decades, and the higher the allocations to private equity, the better the returns. Private Investing for Private Investors: Life Can Be Better After 40(%). (2019, February)

The concerted efforts by the SEC and private equity firms are attracting individual investors seeking above-market insulated returns for the next ten years.

“We are exceedingly bullish on private equity as an asset class for its propensity to drive outsized investor returns in the years ahead,” says Greg Bassuk, chief executive officer for the alternative investments firm AXS Investments.

“Likewise, the next decade also will represent the very first period during which financial advisors and their investor clients will have as much access to private equity investing as needed to enable the broader investing public to reap the same benefits of private equity exposure as their institutional investor counterparts have enjoyed for years.”

Private equity has been a source of wealth generation for investors for many years. Investors are particularly interested in early-stage companies with the greatest potential for long-term growth.

Perhaps the greatest appeal of private equity is the transparency afforded to potential investors granting them access to a private company’s executives to field questions and concerns regarding an investment opportunity to align investment objectives. This transparency is likely the biggest factor allowing investors to mitigate risk regarding private equity.

The appeal of private equity is undeniable. There are reasons for the long-term allocations to this asset class by sophisticated institutional investors and the recent intense interest by individual investors. The principal reasons are above-market returns, reduced risk, insulation from Wall Street volatility, and transparency. This is why you should consider private equity your go-to long-term investment option.