Can private equity funds help you minimize risk and achieve higher returns than other investments?
Introduction to Private Equity Funds
Historically, investors have looked to private equity as a potential source of attractive returns, low correlation to other asset classes, diversification from public securities & the possibility of returns greater than those otherwise available in the public markets.
For the taxable investor, an added benefit is that the majority of returns may receive favorable long-term capital gains treatment. Of course, private equity investments involve substantial risks, including, but not limited to, a loss of capital.
In a low interest-rate environment, achieving return objectives might be challenging
The Fed (Federal Reserve) has lowered rates to almost zero and has made it clear they are not planning on raising rates any time soon.
This can impact rates of return investors expect based on historical results:
- Bank savings rates are low and expected to stay low
- Bond yields are projected to be lower
- Many investors need a higher return than 1% to help reach their retirement goals
- Retirees need a higher return than 1% on their money to survive in retirement
As a result, investors might need to add riskier asset classes, including equities, real estate and private equity to get that higher return.
The Case for Private Equity
- The number of companies in the Wilshire 5000 Total Market Index has dropped from 7,562 (1998) to 3,473 (2019).
- Source: Wilshire 5000 Total Market Index as of 12/31/19. Index contained 7,562 companies on July 31, 1998
- The cost for companies to go public has also increased which has resulted in fewer companies going public.
- This limits the number of public companies for investors to invest in.
Private equity offers an expanded opportunity set & the potential to outperform public equities
- Private equity investing may provide access to innovative companies with significant growth potential. While not all private companies are available for investment, private equity may offer substantial opportunities unavailable in the listed equity markets.
- Almost 5,954 ,684 private companies vs. 3,473 public companies
Private equity investments drive top endowment returns
Private equity is an allocation of choice for many institutional investors, including family offices, endowments & foundations including Princeton, Yale, Dartmouth, Columbia, Brown, Harvard, U Penn, and Cornell.
Problem: Investors have long incorporated private equity into their portfolios seeking to enhance returns but high minimums and lack of resources to evaluate managers, strategies, and risks have contributed to limited access for private clients.
Want to learn more about private equity funds? See the 25 Largest Private Equity Firms
There are 2 types of fund structures for investors when considering a private equity investment
- Access Funds – “Access fund” structures enable high net worth individuals and smaller institutions to invest in private equity. These funds purchase interests in an institutional private equity fund with capital aggregated from many investors and provide due diligence, capacity, education, client service and operational support. They enable individual investors to access private equity funds with a reduced minimum commitment. Generally, investors must be qualified purchasers ($5 million in qualified investments for an individual; $25 million for an entity) and be able to commit capital to long-term illiquid investment.
- Registered funds-of-funds – More recently, investors have been able to access private equity through registered private equity funds-of-funds. This structure enables investors with $1 million net worth (generally, for individuals excluding residence; $5 million for an entity) to invest in a portfolio of private equity funds with substantially reduced minimums. These funds-of-funds typically offer active portfolio management and may focus on particular private equity managers, strategies or vintage years. Some may offer additional benefits, including limited liquidity, enhanced tax reporting and reduced J-curve.
Historically, some investors have had limited access to private equity. Let us help you evaluate what private equity investment options are right for you.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
For Public Use | Tracking # 1-05075565
