As the era of "easy money" appears to be over, investors are increasingly seeking to supplement their private equity fund investments by investing on a deal-by-deal basis, the author of this article argues.

The following article is from Victoria McGurran, director of private client relations at Maven, a UK-based firm that manages private equity and property. McGurran writes about a particular aspect of private equity, an asset class that has seen its fortunes affected in various ways by recent rises in interest rates, disruption to business sectors by the pandemic, technologies, and other forces. The editors are pleased to share these ideas – the usual editorial disclaimers apply to views of guest contributors. Email tom.burroughes@wealthbriefing.com if you want to respond.

Looking forward at the start of this year, the investment landscape is still challenging. Although globally-listed equites and bonds have enjoyed early-year rallies, buoyed by the prospect of faster-than-expected interest rate cuts, there is doubt about how permanent these upturns will be. Commercial property is still suffering from the “comedown from easy money” as one financial commentator put it, while residential property markets are still subdued. 

Given this backdrop, it is perhaps no surprise that alternative investments’ appeal for investors is still strong, along with private equity which is now a key area for HNW individuals. Investors are increasingly seeking to supplement their private equity fund investments by investing on a deal-by-deal basis, which gives them more flexibility both in terms of the types of companies they can back and the sort of deal structures in which they can invest.

Investment case for alternatives still strong
In the low interest rate, subdued economic climate since the GFC, investment in alternatives soared as investors, both institutional and individual, searched for growth assets. According to Preqin, the size of the private capital asset funds, essentially alternatives, under management in Europe almost quadrupled in the 10 years to 2021 with the annual rate of growth rising to over 15 per cent. Even though Preqin expects this to moderate over the next few years, the firm still forecasts an annual [growth] rate of around 11 per cent (1). 

As investors increasingly plan to construct resilient and durable portfolios, alternative assets are a key element. Some 96 per cent of respondents to a recent survey (2), run by a leading specialist fund manager of UK wealth managers and financial advisors, last month said that their clients have built up their allocation to alternative investments. Indeed, 97 per cent of those surveyed believe that the current economic climate favours investment in alternative assets.

True, alternatives’ relative investment performance may be challenged more by, say, listed equity markets, as central bank interest rate cuts flow through, but the enduring popularity of alternative assets, such as private equity, is due in part to the other significant benefits they offer. For instance, they are not correlated with traditional assets such as listed stocks and bonds, providing investors with the opportunity to diversify their portfolio and spread their investment risk as well as helping to mitigate volatility, potentially improving risk-adjusted returns.

Certainly, within the alternatives arena, the popularity of private equity is clear. Typically, HNWs are estimated to hold between 5 and 10 per cent of their portfolios in private equity.

Among ultra-HNWs, the allocation is even higher. Over 20 per cent, according to a recent report by family wealth specialists Campden Wealth, say that they are planning to increase this allocation (3). 

Deal-by-deal approach maximises private equity potential
Private equity’s investment performance speaks for itself. One illustration is a study by the US-headquartered Chartered Alternative Investment Analyst Association (CAIA). Over 21 years, ending in 2021, it showed that private equity allocations by state pensions produced a 11.0 per cent net-of-fee annualised return, exceeding by 4.1 per cent the 6.9 per cent annualised return that otherwise would have been earned by investing in public stocks (4). 

Although the investment case for private equity is strong, individual investors', even HNWs' ability to access private equity opportunities is not straightforward, as most private equity funds target institutional investors. However, for experienced investors, this has been eased considerably by specialists, such as Maven Capital Partners who offer select professional investors a deal-by-deal approach to private equity investing. 

A deal-by-deal strategy, although high risk in nature, also has a number of benefits. Investors benefit from being able to choose specific investment opportunities that align with their investment thesis and risk appetite. They are also able to gain access to a diversified pool of curated investments, each of which can be considered on their own merits. It also offers a more nuanced approach to risk management. By spreading investments across multiple deals, investors can reduce the impact of any one or more investment on their overall portfolio performance.

Investors also have greater visibility and control over their investments. Since each deal is evaluated individually, investors have access to detailed information about the target company, its financials, and growth prospects. This, again, empowers investors to consider each opportunity in turn, rather than simply investing in a blind pool. Moreover, such a deal-by-deal strategy is a perfect complement to an existing portfolio that is exposed to more mainstream retail products such as VCTs. 

All this gives deal-by-deal private equity investing the potential to outperform. By carefully selecting individual investment opportunities, investors can put their capital in companies with promising growth prospects and strong potential for value creation. This targeted approach, combined with active involvement from co-investment specialists in the portfolio companies, using their skill, experience, and track record, provides potential for superior investment performance and higher returns for investors.

Choosing the right investment specialist is essential
Although investors have an increased appetite for alternatives, a recent survey by leading investment platform Shojin revealed that some 60 per cent of investors find gaining access to alternative assets difficult (5). Given that these private market opportunities can be quite recondite, it is therefore critical that high net worth investors who wish to access private investments on a deal-by-deal basis choose an experienced investment specialist who can identify the opportunities suited to a client’s investment requirements, and with the right sector knowledge to carry each particular deal to its maturity. Co-investment specialists established in the private equity sector are best placed to support high net worth individuals because they have strong track records in private equity where co-investment is an extension of such expertise.

The democratisation of private equity is speeding up. Investors who want to pep up the potential performance of their portfolios this year should consider deal-by-deal private equity investing as an increasigly viable option.

1, https://www.preqin.com/LinkClick.aspx?fileticket=-tGWmjLQdRI%3D&portalid=0
2,  New research with financial advisers and investment professionals reveals the growing importance of alternatives in client portfolios | TIME Investments (time-investments.com)
3,  https://www.campdenwealth.com/report/ultra-high-net-worth-private-equity-investing-report-2023
5, https://caia.org/blog/2022/07/20/long-term-private-equity-performance-2000-2021
6, https://www.ftadviser.com/investments/2022/12/01/third-of-uk-investors-considering-alternative-assets/