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Benefits of allocating to private equity

Benefits of allocating to private equity

A series of key benchmarks for UK private client portfolio performance that are widely used by investment managers and financial advisers went live at the start of March. However, they have been criticised for having no exposure to private equity.

The MSCI WMA Private Investor Index Series is comprised of five indices that track different multi-asset investment strategies with corresponding risk/reward profiles. Each strategy index includes varying weightings of a number of asset classes: equities, fixed income, property, cash and ‘alternatives’.

‘The benchmarks encompass a range of asset classes including hedge funds, but not private equity,’ said Roger Pim, deputy head of SL Capital Partners, the private equity arm of Standard Life Investments, which manages the Standard Life Investments Private Equity Trust.

‘We understand that there’s a large investment universe available to wealth managers and that private equity is likely to be a relatively small component of any portfolio. However, it is disappointing that the benchmarks private client fund managers are measured against ignore an asset class that has a number of clear merits and can provide enhanced performance.’

‘Many private client fund managers we meet are very open to the private equity opportunity and have considerable holdings in listed private equity funds. However, they have to report to clients against the benchmarks. So it is frustrating that they are incentivised to downplay what can be an attractive component of an investor’s portfolio over the longer term.’

There are several key benefits of having an allocation to private equity within a wider portfolio.

1. Diversification

One of the main benefits of private equity is its diversification potential thanks to there being as many as five times the number of private companies than listed businesses.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, the investment broker, said: ‘Private equity is similar to listed equities in that you are still taking a stake in a company and are thus tied to its fortunes. Except, the company is often unlisted and private equity managers as majority owners of businesses tend to take a more hands on role in the management of the company.’

2. Reduced correlation

Private equity is a control strategy that is focused on fundamentally improving businesses and can offer reduced correlation to other markets.

‘As private equity is unlisted, it is immune from the day-to-day vagaries of the market and has a low correlation to other asset classes,’ said Darius McDermott, managing director of FundCalibre, the fund ratings and research provider.

‘Often, these companies are unlisted as the management want to focus on growing the business quietly and private equity is a way of raising capital without having to go to the market ‘proper’.

They are illiquid and higher risk though so the strategy needs to be deployed with a full understanding alongside an experienced operator.’

3. Potential outperformance

Pim points to the potential outperformance of the asset class. ‘To put it simply, listed private equity has outperformed quoted markets consistently over the long term,’ he said.

Architas, the multi-manager, believes investors could be overlooking the opportunity that private equity presents today.

‘The potential is there for private equity specialists who have the skillset to enhance the value of companies,’ said senior investment manager Nathan Sweeney. ‘Credit conditions are loosening, which will provide finance for the sector while interest rates remain low so finance is still relatively cheap.

‘The real opportunity for investment will present itself if returns from different asset classes become more lacklustre, as people will begin to look elsewhere for a boost to portfolios.’

4. Ease of access

Wealth managers and retail investors have straightforward access to private equity through a number of listed investment trust vehicles on the London market.

‘UK investors can gain access to private equity via a number of investment companies and investment trusts listed on the UK stock market, some of which invest directly in private equity, while others, like the Standard Life Investments Private Equity Trust, invest indirectly via other funds,’ said Khalaf.

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The opinions expressed are those of © Standard Life Aberdeen as of July 2017 and are subject to change at any time due to changes in market or economic conditions.

This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice.

The value of an investment and any income from it can fall as well as rise and is not guaranteed. An investor may get back less than they put in. Past performance is not a guide to future performance.

Issued and approved by © Standard Life Aberdeen.© Standard Life Aberdeen is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. © Standard Life Aberdeen is authorised and regulated by the Financial Conduct Authority.

© Standard Life Aberdeen, images reproduced under licence.

This article was provided by Standard Life Investments and does not necessarily reflect the views of Citywire

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