Background
Private equity has been an established asset class for institutional and private investors for well over two decades. The potential for outsized returns and exposure to the most exciting and innovative companies continues to drive investors toward the asset class.
Growth in Private Markets AUM
According to Preqin, alternative assets under management grew from $4.1 trillion in 2010 to approximately $10.7 trillion at year end 2020, a 10.6% annualized pace. Over the next five years, alternatives are projected to grow at a 9.8% annualized rate including growth of 15.6% per year for private equity assets. There is also a notable shift in the type of strategies that investors prefer as expected growth in private equity and private credit assets far outpaces the expected growth of hedge fund assets. While there are a combination of factors driving overall growth, low interest rates, low forecast equity returns, and increased availability of alternative investment vehicles continue to support increased investor allocations.
Private Equity Returns
Although much of the growth in alternative assets can be attributed to the factors mentioned above, none of these would matter if historical data did not demonstrate a clear return advantage for private investors. Although data lags make comparison of public and private market returns imprecise, there remains strong evidence of long-term outperformance by private equity investments. Over the trailing 5, 10 and 20-year periods ending June 30, 2020, private equity investments equaled or far exceeded other liquid equity assets classes.
Capturing Returns from Private Investments
Historically, risk-seeking investors could look to the small cap market as a potential source of incremental equity returns as many newer, growth-oriented companies reside there. However, increased access to private investment options and the subsequent flow of investor dollars into the asset class led to a change in how investment gains are split between public and private investors. Twenty years ago, many companies racked up gains in public markets that rivaled or exceeded those available in private markets. In more recent IPOs of high-profile companies including Facebook, Alibaba and Snap, private investors captured a much larger proportional gain than post-IPO investors.
Other Considerations
Building a successful private investment program involves key trade-offs: liquidity versus long-term return potential, access versus allocation targets, and fees versus alignment of interests. Investors must become comfortable with issues that are not present in most traditional investment markets. Identifying and gaining access to high-quality investment strategies can take years. Mistakes can be costly as investment horizons often span a decade or more. Fees are high, liquidity is low and administrative burdens are materially higher than public equity markets. Identifying the right mix of investment vehicles and partners to achieve the long-term goals of the investment program while simultaneously managing risk is key to long-term success.
Our Position
There are many reasons for investors to pursue private investments. Some require incremental return potential to achieve a stated return objective. Others may desire early access to the next generation of great technology companies. In any case, private investments continue to play an important role as potential return enhancers. Although not appropriate for all portfolios, investors with the time-horizon, risk tolerance, patience and ability to identify and access high-quality private investment options should continue to be rewarded with incremental returns above those available in public equity markets.
Disclosures:
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein.
Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements.
The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.
Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put.
The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.
Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees.
This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.