If you're an Australian investor looking to grow your wealth, you may be wondering why you should consider private equity investments. Private equity involves investing in private companies that are not listed on the stock exchange and can offer significant benefits to investors who are willing to take the risk. At Reach Alternative Investments, we provide investors access to top-tier private equity funds.
Diversification and Higher Returns
Private equity investments can provide diversification benefits to investors, as they offer exposure to a different set of companies than those available on the public markets. According to a study by PitchBook, private equity funds generated a median net internal rate of return (IRR) of 11.0% from 2000 to 2021, outperforming public markets[1]. For reference, the annualised returns of the ASX 200 was approximately 4.45% since 2006[2]
By investing in private equity, investors can gain exposure to companies that are not dependent on the public markets for funding and may have different growth prospects and risk profiles. Additionally, private equity investments have the potential to generate higher returns than traditional investments such as stocks and bonds.
What is the difference between private equity and public equity?
Private equity investments enable investors to gain exposure to high-growth companies and industries that are not accessible through traditional public markets. By investing in a carefully curated portfolio of private companies, investors have the opportunity to achieve potentially higher returns than those offered by public equities. Furthermore, private equity investments can provide superior portfolio diversification, reducing overall risk by minimising the correlation with volatile public market fluctuations.
What is the difference between private equity and real estate?
With a focus on high-growth companies, private equity has the potential for higher returns than real estate. Investors also benefit from the strategic, value-driven approach of experienced private equity fund managers, unlocking unique opportunities and exceptional outcomes. Furthermore, the active involvement of private equity fund managers in their portfolio companies ensures a strategic, value-driven approach to investments.
Access to Innovative and Disruptive Businesses with Long-Term Focus
Another key benefit of private equity investments is the opportunity to invest in innovative and disruptive businesses that may not be available through traditional investment channels. According to McKinsey, private equity investment in technology companies has grown significantly over the past few years, highlighting the sector's innovation[3].
Private equity investors can access companies that are at the forefront of new technologies or business models and may have the potential to generate significant returns over the long term. Private equity investors typically have a longer-term investment horizon than public market investors, which can help align the interests of investors and company management, creating value for all stakeholders over time.
A short case study for private equity
In the early 2000s, LEGO was struggling financially, with a net loss of USD 290 million in 2003. The founding family partnered with private equity firm Blackstone Group to bring in a new CEO. After implementing successful turnaround strategies, LEGO's net profit reached USD 1.47 billion in 2019. This remarkable transformation, supported by the expertise and resources provided by the private equity firm, helped LEGO become the world's most valuable toy company, with an estimated brand value of USD 7.57 billion in 2020.
What are the differences between smaller and larger private equity funds?
Larger funds often have access to more significant resources, leading to a diverse range of investments that can help mitigate risk and enhance returns. According to a PitchBook report, top-quartile larger private equity funds have historically outperformed their smaller counterparts by a median of 3.3 percentage points in terms of internal rate of return (IRR) over a 10-year horizon[4]. By choosing larger private equity funds, investors can capitalise on their financial strength, expertise, and industry connections, leading to superior returns and reduced portfolio risk.
Why Do Pension Funds Invest in Private Equity?
Pension funds are some of the largest investors in top private equity funds, and for good reason. According to Preqin, as of 2021, global pension funds accounted for 28% of private equity assets under management[5]. Private equity investments can provide pension funds with exposure to a different set of companies than those available on the public markets, which can help diversify their portfolios and reduce risk. Additionally, private equity investments have the potential to generate higher returns than traditional investments, which can help pension funds meet their long-term funding obligations.
Why Do Rich People Invest in Private Equity?
Private equity investments are also popular among high-net-worth individuals and family offices. A report by the Alternative Investment Management Association (AIMA) found that family offices allocate around 21% of their investment portfolios to private equity[6]. These investors are often looking for ways to diversify their portfolios and generate higher returns, and private equity investments can offer both. Additionally, private equity investments can provide access to innovative and disruptive businesses that may not be available through traditional investment channels and can offer the opportunity to have a direct impact on the growth and success of these companies.
Risks and Considerations
While private equity can provide benefits such as increased returns and diversification, Australian investors need to weigh specific considerations before deciding if it's the appropriate investment route for them.
Management fees
Assessing a fund necessitates examining its net performance, after fees, instead of solely concentrating on gross return metrics. Fee transparency is essential, and at Reach Alts, our goal is to present as many investments as we can in net terms.
High minimums
Conventional private equity investments frequently demand high minimums, which may deter individual investors. Reach Alts strives to make private equity more accessible to individual Australian investors by lowering these minimums.
Low liquidity and postponed cash flows
Private equity funds generally have lock-up periods, rendering them as long-term, illiquid investments. Moreover, a private equity fund's investment and profit realisation schedule can cause delays in cash flow for investors. The J-curve return profile is discussed in ‘How Does Private Equity Work?’, alongside how secondary market trading of private equity stakes can alleviate liquidity and cash flow concerns.
Risk of loss
Private equity investments carry a high level of risk and may lead to partial or complete capital loss. Alternative investments are intricate, speculative instruments appropriate solely for qualified investors possessing adequate knowledge and experience to comprehend the associated risks.
Conclusion
In conclusion, private equity investments offer many benefits to Australian investors who are looking to grow their wealth. From diversification and higher returns to access to innovative and disruptive businesses, private equity offers a unique set of advantages. Pension funds and high-net-worth individuals are among the investors who have found private equity investments to be a valuable addition to their portfolios. If you're interested in exploring private equity investments, be sure to work with an experienced advisor who can help you evaluate your options and manage your risk.
If you are interested in getting started with private equity, we recommend you take a look at our available private equity funds.
[1] CAIA Association, "Long-Term Private Equity Performance: 2000 to 2021" Link
[2] S&P Dow Jones Indices, "S&P/ASX 200 (AUD) - S&P Dow Jones Indices," Link
[3] McKinsey & Company, "The rise of private markets: The new geography of global investing," Link
[4] PitchBook. (2019). PitchBook Benchmarks: Private Market PlayBook. Retrieved from https://pitchbook.com/news/reports/2019-private-market-playbook
[5] Preqin, "Preqin Global Private Equity & Venture Capital Report 2021," Link
[6] Alternative Investment Management Association, "Family Office Allocations to Alternatives: AIMA Family Office Survey," Link
