Here are 3 things retail investors need to know about private equity after an SEC committee voted to improve access to the trillion dollar industry
- Private equity funds invest directly in companies that are not publicly traded.
- The industry has tripled in a decade and is projected to top $ 1 trillion this year.
- An SEC panel voted to improve access to private equity vehicles, opening the door for private investors.
Retail investors could soon have access to one of the top performing asset classes of the last decade after the SEC’s Asset Management Advisory Committee unanimously voted to recommend increased access to private equity funds.
Private equity vehicles invest directly in unlisted companies and are typically funded by pension funds, insurance funds and high net worth individuals. Some of the marquee names in the room are Blackstone (BX), Carlyle (CG), and KKR & Co. (KKR).
The industry, which has tripled since 2011, is well on its way to generating over $ 1 trillion this year through deals, fundraising and exits, according to management consultancy Bain. The SEC’s recommendation could provide funds with access to US savings estimated at $ 74 trillion.
“We can’t say for sure what [the US regulator’s] Core motivation is, “Cameron Joyce, vice president of research at data company for alternative assets Preqin, said in a recent interview with Insider Protected.”
“The asset class is certainly less transparent than public stocks and it is more difficult for investors to fully assess the risks,” he added.
Insider spoke to Joyce to find out what retail investors need to know about private equity.
Public Markets Outperforming
According to Bain, US private equity funds have returned around 15% over the past decade. This outperformed the S&P 500 index, which returned 13.6% over the same period.
Joyce said the industry benefited from the low interest rates, which improved corporate access to credit. Fund managers can also take an active role in managing portfolio companies and helping them generate higher profits.
“Private equity managers have more leeway to generate alpha compared to listed equity managers because they actively participate in portfolio positions,” he told Insider. “This, along with favorable financing terms, has helped private equity outperform public markets in the past.”
However, Joyce also pointed out that conditions for buyout firms may become less favorable. According to Bain, private equity outperformed the stock market by just 0.2% last year.
“While historical returns have been good, there is no guarantee that it will stay that way – especially if higher inflation leads to higher interest rates and widespread decline in the valuation of these companies,” said Joyce.
Investors are tied for the long term
Private equity funds typically lock investors’ money for five years or more. This enables the funds to take a long-term investment approach and gives them more time to look for attractive deals.
Huge pension funds like CalPERS (with 30 billion long-term.
But Joyce said retail investors may not always be ready to lose access to some of their savings for five years or more. This could be of particular concern if the next decade is tumultuous economically, as Wall Street is already concerned about high inflation and sluggish growth.
“Capital can be locked up for long periods of time and it can be more difficult for managers to leave positions during times of financial turmoil,” Joyce told Insider.
‘Flatforms’ already offer access
Investors typically need to invest at least $ 25 million in most private equity funds. Historically, this has made them accessible to very wealthy individuals – but out of the question for the average private investor.
“Flatforms” aim to change this by offering a lower barrier to entry. These vehicles bundle individual investments in a feeder fund and then buy their way into the private equity market.
Joyce pointed to Moonfare as an example. The UK platform claims it has $ 1 billion in assets under management, although customers still need to invest at least Â£ 50,000 ($ 70,000).
“A number of flatforms, like Moonfare and Seedrs, already offer access,” said Joyce. “There is no doubt that private equity managers are interested in the huge potential that the retail market offers.”