When modern private equity pioneers Kohlberg, Kravis, and Roberts raised $ 30 million for their first buyout fund in 1978, the money came from a tight circle of backers.
In the decades that followed, as KKR and its private equity peers grew into giants with billions of dollars under management, the industry never quite shaken its reputation as the prerogative of institutions and corporations. ultra-rich, where sophisticated investors can find much higher returns. than those available to the average saver.
More recently, however, private equity has become increasingly accessible as top managers such as Blackstone, KKR, Carlyle, Apollo and Ares have gone public and new investment vehicles have opened the door. to individual investors to share the attractive returns of private equity.
Retail investors will soon gain another entry point into private capital, as Petershill Partners of Goldman Sachs, which has minority stakes in a range of alternative asset managers with a total of $ 187 billion in assets under management, has announced its intention of an IPO in London.
But, at a time when the shares of major publicly traded private capital managers have tripled in value from the depths of Covid-19 and the pandemic has heralded a frenzy of high-priced deals, which self-directed investors should consider before settling in. to launch in the private equity?
“I think the markets are sparkling right now,” said Claire Madden, managing partner of London-based alternative investment firm Connection Capital. She warned that companies could try to capitalize on the buoyant market. “Private equity managers. . . will see that the markets pay higher prices, ”she said.
However, market timing shouldn’t be a priority for investors considering getting into private equity, experts say. Investors must be prepared to buy and hold for the long term, as the value of private equity transactions takes years to accumulate.
“It’s not something that as an investor you should be looking to trade,” Madden said.
While some believe all investors should consider a small allocation to private markets – to diversify their portfolios and increase returns – others argue that the long-term horizons and complexities involved make the sector better suited for wealthy investors than it is. to retail players.
“It really is a product for millionaires and multi-millionaires, whereas before it was a product for people with hundreds of millions or billions,” said Alex Davies, founder of Wealth Club, a department of investment that helps high net worth clients select private investments.
Part of the appeal comes from private equity’s reputation for strong performance, but returns vary by industry. The top quartile of global redemptions has returned a handsome 20% on an annualized basis over the past 10 years, according to State Street. Meanwhile, the bottom quartile of the sector has limped, with returns close to zero.
“There are a lot of managers who are very average, I think,” said Mick Gilligan, head of fundraising at wealth manager Killik and Co.
At the same time, competition between managers is intensifying. Private equity firms have made more deals in the UK in the first half of the year than in the same period of any year on record, and many firms are still raising funds faster than they can spend them. The private equity industry has more than tripled its assets to $ 7 billion in the past decade, according to Morgan Stanley.
“There is currently much more demand than supply in terms of available investment opportunities,” said Jeffrey Sacks, European Head of Investment Strategy at Citi Private Bank.
Investors must also choose how they wish to enter the sector, as the range of options has mushroomed. The main route for ordinary investors is through the stock market, where a number of investment funds, ETFs and listed companies offer different types of exposure.
Some vehicles support a particular private equity fund, while others diversify into a “fund of funds” which itself invests in a portfolio of buyout groups. Another option is to buy shares of the listed private equity manager itself, which allows investors to gain exposure to its commission income.
The performance of managers is primarily based on their ability to continue to grow their asset base, on which they charge lucrative management fees to institutional investors such as pension funds. They also receive a share of the profits of successful funds, known as “deferred interest,” usually 20 percent.
Petershill’s planned IPO will provide yet another structure. The company has stakes in 19 global alternative asset managers, including private equity but also private credit, hedge funds and real estate, making it a diversified option. A public listing could value the portfolio’s assets at over $ 5 billion. Part of the appeal to investors is that it is a gamble on Goldman Sachs’ ability to access the best deals and select the best performing managers.
Investors should also be mindful of the costs and level of transparency about who is reaping the rewards of a good performance. Bridgepoint, which this summer became the first private equity firm to be listed on the London Stock Exchange since 1994, has been criticized for not disclosing the amount of money its executives receive from “deferred interest” payments .
Buying into structures like funds of funds can also mean paying multiple levels of fees, in an industry sometimes criticized for its high fees. In an article published last year, Oxford academic Ludovic Phalippou estimated that “private equity funds have generated roughly the same return as public equity indices since at least 2006”, while collecting $ 230 billion in performance fees.
As investors weigh the costs against the performance promise, they are under more pressure to invest money in private markets as fewer companies choose to go public.
Peter von Lehe, Senior Manager of NB Private Equity Partners, said: “Because private equity now owns more companies than 20 years ago, if retail investors don’t have access to private equity investment, the universe of business investment for retail investors has shrunk.