Private equity has been in the ascendant for several years. Andrew Carrier asks what the democratisation of the asset class means for wealth managers and their clients
A large and growing share of assets allocated by big pension funds, endowments and sovereign wealth funds is going into private markets. For a panel of 10 of the world’s largest funds examined by The Economist in January 2020, the median share had reached 23 per cent. And for good reason.
According to the British Private Equity and Venture Capital Association, private equity continues to comfortably outperform public markets. The association’s 2019 Performance Measurement Survey reveals the five-year and 10-year annual returns were 20.1 per cent and 14.2 per cent respectively. By comparison, the FTSE All-Share returned 7.5 per cent and 8.1 per cent to investors over the same time periods.
But investment performance is only part of the asset class’s growing appeal. Whereas in the early 2000s, the sector had a reputation for loading portfolio companies with debt and asset-stripping, today the star of the private equity universe is venture capital. And it’s feverish.
SoftBank’s Vision Fund, a $100bn private-capital vehicle backed by Saudi Arabia’s sovereign-wealth fund, has funnelled cash into fashionable, unlisted start–ups. Other institutions have vied with it to write big cheques for Silicon Valley’s brightest new stars. Keeping a company private allows managers to focus on making positive and lasting changes to the business, rather than meeting the short-term demands of stock markets and shareholders.
Power to the people
The catch – there’s always a catch – is that this attractive asset class has traditionally been the preserve of large institutional investors such as pension funds, insurance groups and sovereign wealth funds – not least because most PE funds have high minimum commitments and operational complexities that tend to exclude all but the most sophisticated investors with deep pockets.
Recently though, that’s started to change. The sector is waking up to the trillions of potential capital it is leaving on the table from smaller institutions, family offices and private investors.
In March, Passion Capital – the prominent, tech-focused PE firm announced a partnership with the crowdfunding platform Seedrs. Private individuals who self-certify as ‘high net worth’ or ‘sophisticated’ on the Seedrs platform can back the Passion Capital portfolio directly. If the experiment goes well, other PE firms will surely follow Passion’s lead.
Investors may also take note of Moonfare. Launched in 2016, the German platform is now being aggressively marketed to private investors in the UK via social media and prominent ads in the Financial Times. The company claims it takes just 15 minutes from signup to subscription, from where customers can invest directly or through a buyout portfolio. The portfolio has a €50,000 minimum and is made up of a set of core investment opportunities providing access to the top tier funds on the platform. In April 2021, it announced the launch of its Growth Equity Portfolio, a new portfolio of technology funds.
Position with partners
What does this mean for wealth managers that want to position themselves as able to help their clients get a piece of this fashionable asset class? Some are building up their private equity capability in-house but that tends to be time-consuming and expensive.
Truffle Invest was set up in 2018. The company provides solutions for wealth managers, financial advisers and other intermediaries so they can provide their clients with access to private equity. These range from a full private markets programme to an execution–only service.
London-based Titanbay, founded just last year, has a slightly different approach: it aims to provide small to medium-sized institutional investors and professional private investors with the same type of opportunities that large institutions have enjoyed in recent years. In the words of CEO Thomas Eskebaek, it provides clients with ‘access to the top-performing funds and the analysis tools they require to construct a thoughtful private equity and alternatives portfolio akin to those of leading large investors.’
Like Moonfare, Titanbay serves private clients directly too, but the company is focused on helping wealth managers and private banks by providing ‘full stack, modular solutions’.
With the barriers to access now being torn down, individual investors and their wealth managers are poised to make private equity a little less ‘private’. And to inject trillions of new capital into the sector in the process.
Look before you leap
Dazzled by impressive historical returns and the promise of contributing to a greener, more prosperous society, it’s easy for private investors to be blind to the hazards.
The first such hazard is obvious. As all of this new capital floods into private markets, it’s possible that returns will suffer. The large private equity managers are getting larger. And so are their fixed costs. One has to wonder whether that will create pressure on them to look at deals that previously they would have shunned.
The second concern is liquidity. Private equity funds are fixed-term – typically five or ten years. While some of the new platforms are trying to tackle his (Moonfare, for example, offers its clients access to its own secondary market), public markets are hard to beat when you need to sell an asset in a hurry.
As asset values climb and borrowing remains cheap, the private equity boom and efforts to democratise it show no sign of abating. Whether they could survive rising interest rates, or a recession is less certain – but that’s not a question anyone will be asking – publicly at least – for five or ten years.