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INVESTING in private markets is increasingly gaining traction in Asia among high net worth individuals (HNWIs) who are hunting for yield. Private equity investments offer investors the opportunity to generate higher absolute returns while improving portfolio diversification. Investors can indirectly acquire a share of a privately held company, and as a result earn a portion of its profits if the company is financially successful.
According to performance statistics from investment firm Hamilton Lane, over the past 10 years, the All Private Equity Index outperformed public indices such as Russell 3000 and MSCI World ex USA by 4.2 to 7.6 per cent respectively, annually. Outperformance can be further enhanced by investing with the best-performing managers, who typically generate top-quartile investment returns.
According to AI intelligence company Preqin, these managers have exceeded private equity's median benchmark by an average of 9.4 per cent over the past 25 years. Private equity investing is both a knowledge and a skillsbased business, and generating top-quartile returns depends on the skills of the manager and how he or she can navigate an investment to a successful outcome.
Private equity investing has a number of benefits for investors. For instance, the performance of private equity funds is less dependent on the general stock market and interest rate trends than other product classes; long-term returns have frequently outperformed those of public equities.
Private equity investing can be attractive to investors as it allows one access to asset classes which are otherwise difficult to access. It gives exposure to enterprising private firms whose managers have greater strategic freedom than public firms, and can be the catalyst for change to create value in the company.
According to Preqin, private equity assets under management (AUM) more than tripled, expanding from US$1.2 trillion to US$4.2 trillion between 2005 and 2015.
HNWIs will increasingly become the target clientele of private equity firms. According to a Palico survey, 77 per cent of firms say they have solicited capital from HNWIs in the past, and an even higher 87 per cent say they plan to raise capital from them for their next fund. HNWIs represented just over 10 per cent of total private equity assets in 2015, up from 6 per cent in 2008. Nearterm growth in this segment will be facilitated by "feeder funds", which are pooling vehicles for accumulating AUM.
Various studies showed that family offices increasingly invest heavily in alternative investments. A 2015 Mythos Family Office, Bayerisches Finanz Zentrum/ Complementa study shows that the private equity allocation of surveyed family offices ranges from zero to 60 per cent. The allocation to hedge funds ranges from zero to 95 per cent.
According to a 2016 Credit Suisse White Paper titled "Revisiting Alternative Investments", private equity investments outside of traditional fund structures, namely co-investments, direct investments and separate accounts, amounted to an estimated US$150 billion in 2015, representing approximately 26 per cent of capital raised during the same period.
For the HNWIs, strategies which minimised the J-curve effect, such as secondaries fund or mezzanine investment which pays regular coupon, and open-ended fund which offers a one-stop solution to private markets with monthly liquidity, have been popular at Credit Suisse. For ultra HNWIs, direct investments via club structures and thematic solutions such as financial technology are more popular.
Some of the success factors we have seen in Asia were due to potential early cash distribution (minimised Jcurve effect), low volatility, low loss ratio, diversified pool of investments and a consistent track record.
Depending on their individual return targets, investment horizons and risk appetites, investors have to carefully examine the suitability of the various private equity offerings for their respective investment profiles. Investors not only need to choose from a variety of categories and manager strategies, but also decide how they want to gain exposure. They may want to benefit from targeted investments via single managers, or may value the benefits of well diversified opportunities such as funds of funds, mandates or basket solutions.
Furthermore, they need to decide whether they want to implement their allocation passively, by delegating the investment decision to an institution, or be actively involved, for example by receiving advice from private equity experts. Finally, investors may choose from various investment vehicles.
In selecting the right vehicle (be it a private equity feeder fund or open-ended fund or club deals), private equity specialists are able to match the required minimum investments, liquidity, tax and legal considerations, and the flexibility of investment guidelines. Investing in private markets should offer Asian investors the opportunity to diversify and optimise their portfolios, especially in times of market uncertainty. W
Rajesh Manwani is Head of Investment Solutions and Products, Private Banking Asia-Pacific, Credit Suisse