What’s the best way as an individual investor to take part in the diversification and performance benefits of Private Equity, if any?
You can also buy the stock of some PE companies. To get exposure to specific deals, you probably need a lot more money.
There are a handful of public PE firms. They’re referred to as Business Development Companies. Apollo, Kohlberg Capital and Fifth Street Finance come to mind. The big money is in the private PE firms though and you would need serious cash to invest in one of their funds.
Try to get married to the daughter of a high ranking executive at a major PE Firm.
unless you are worth $100M and can invest in 5-10 diff funds, the best way is via a FOF (in which minimums are usually $2.5m to $5M)
if you dont have that type of scratch, then stick to mutual funds like the other 99% of the population
This is what I’ve considered before, but can we reasonably expect the same returns from investing in public PE firms as we would if we were part of the contributed capital to a PE firm’s portfolio, on average?
^ no, you get no direct exposure to the deals this way, you are betting on the firm
Look at FIG stock performance vs their products…ain’t even close
Just lever up some SPY and you’ll get the same returns in the long-term…
Haha, are you suggesting the PE only outperforms due to significant leverage use? If that’s the case, why not just create a portfolio of highly levered companies.
I think PE can add value to investments. The PE company can influence the management into doing things that increase valuations. Otherwise, if it’s a prestigious PE company, they can increase the visibility and desireability of the target company through name association. I don’t know if PE as a whole shares this benefit, of course.
Good post. I’ve wondered the same thing. Papers I’ve read per CAIA have often stated that synthetic PE/HF ETFs are not nearly as effective as a direct investment in a PE/HF.
QAI is a fund I’ve watched for since inception. The performance is nothing noteworthy despite being a multi strategy HF ETF.
Depends on the kind of PE. I recall studies suggesting that most of PE returns was ordinary equities plus a liquidity premium. Does make you wonder if you can get something similar just by investing in a diversified group of illiquid assets (answer: probably not, but it’s amusing to think about).
LBO people of course make their money on levering up the equity returns, so there’s that. They’ll tell you that they are also making managerial changes to improve operating cash flow, which may or may not be true, but sure sounds better than saying “we just lever up.”
In venture capital, there’s more of an argument that picking and choosing companies and adding connections and managerial expertise adds value, but I suspect most of it is about using unequal access to capital to create the bargaining power to extract a higher proportion of ownership than would be possible if these companies could somehow be born public. This makes you wonder what things like kick starter might one day do for venture companies (the targets, not the providors).
There are listed vehicles but a lot of them aren’t very good. Take a look at HgCapital Trust. That’s the best I’ve come across.
Check out this study on PE returns. I think that’s pretty solid evidence that PE has significantly outperformed the public equity markets over the past 30 years.
What kind of returns are you aiming for?
The way I think about PE returns is that over a 5 year period (i.e. the medium term), I’d expect it to beat the public markets by at least 2% per annum net of all fees. Hopefully coniderably more than that.
So if you expect the markets to average say 8% CAGR over a 5 year period, then you’d be hoping for 10%+ from PE.
I think of PE as a investment vehicle with low correlation with the markets. It’s a good diversification tool. But I wouldn’t put all the eggs in that basket
I dont know that the low correlation point has worked in actuality, and think PE should be viewed not so much as a diversifier but as a return generator over public markets. There’s a fair argument as whether the returns of the past are replicable or if they are attractive given the additional risks over publics.
I havent seen PE replicating ETFs, but the HF replicators are just based around weighting some different betas. In this case, maybe you get some of the benefit of what a systematic return stream should be in a hedge fund, but there is still the residual (manager specific) returns that an ETF can’t capture (be it positive or negative).
Lastly, PE stocks are a different animal. There isnt participation in deals, yet benefit from the success/realization of investments in addition to fundraising. Too many factors go into evaluating them for my liking, but I dont think you can say it is anywhere near equivalent to gaining PE exposure, to me its more of you are buying an asset manager.