Feature – Private equity
One of the people behind the research said they surveyed more than 500 institutional investors about challenges and opportu- nities in investing in private markets and found strong support for ongoing investment in this asset class.
“In fact, 68% of respondents indicated that they would continue to invest over time and only 25% of respondents indi- cated that they would allocate less over time.” Family offices are putting their faith in private equity too. Gold- man Sachs’ 2023 family office investment insight report, also published in May, revealed that family offices are planning to increase their allocations to private equity. Its research, which surveyed family offices that most resemble institutions (more than 70% of respondents had a net worth of at least $1bn) found that nearly half (41%) plan to do so in the next 12 months. The researchers said the ongoing focus on private equity was “unsurprising” and attributed it to the ability of the asset class to access innovative companies earlier in their lifecycle than in public markets, as well as to its history of outperformance. Reflecting on the reasons for the continuing popularity of pri- vate equity, despite the challenging backdrop, Martin Dietz, head of diversified strategies at LGIM, says there are clearly some positives about the asset class in general. “A lot of private equity is about buyouts and that, in principle, is about looking at relatively stable smaller companies. We see this type of com- pany as one that tends to do quite well over the long term.”
Advantages and rewards
Private equity has a wide range of plus points, says John Euers, co-head of M&G Alternatives. “Most notably its track record of delivering strong, absolute return across cycles, over the past decade, resulting in three, five and 10-year pooled private-equi- ty buyout returns of 20.9%, 18.3% and 17%, respectively, according to data and analytics specialist Burgiss. “With private-equity fund valuations typically taking place on a quarterly basis, these funds are often insulated from the mark- to-market swings that take place in other asset classes and over time, have demonstrated lower volatility than public equity markets,” Euers says. “In addition to this, investors are often attracted to the diversification offered by private equity.” Euers also explains how investors’ perceptions of high risk can be addressed: “While private equity is an asset class that is maturing, some investors may perceive it to be a high-risk strategy through the belief that they will be investing in early- stage ventures that feature binary outcomes.” This, he says, can be overcome by carefully selecting funds with a track record and through careful due diligence on their strategy. As an example, Euers notes M&G’s portfolio consists of more than 3,000 underlying companies, so benefits from a high level of diversification. “No one deal will determine the overall performance of the portfolio,” he says.
48 | portfolio institutional | June 2023 | Issue 124
Another benefit of investing through a broad portfolio of pri- vate equity funds is vintage year diversification, Euers says. “This means that our managers are buying and selling invest- ments at different times, so we are not overly weighted to a par- ticular point in the cycle.”
Looking at the opportunities, rewards and risks for institu- tional investors of allocating to private equity – and more broadly, private markets, Peter Vincent, regional head of client investment solutions for EMEA at Franklin Templeton Investments says. “Private markets provide an expanded uni- verse of investment opportunities as public markets continue to shrink and become more concentrated.
“They have matured such that many companies can stay pri- vate for longer, reducing the ability for public-market investors to access the full breadth of companies powering the global economy.” Vincent adds that private markets offer the potential for an illi- quidity premium and higher manager alpha. “But this must be weighed against liquidity risk, manager dispersion and fees,” he says.
New entrants It’s not just institutional investors, asset managers and family offices who see the potential of private equity. In May 2022, government-founded workplace-pension scheme Nest launched a private equity mandate, appointing Schroders Cap- ital to manage it. This was followed by awarding a second man- date to HarbourVest in July. Nest said it anticipated having around £1.5bn deployed in pri- vate equity by early 2025, with a longer-term target to have
Investors are often attracted to the diversification offered by private equity.
John Euers, M&G Alternatives
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