Private Equity: The Secret Weapon of the Ultra-Wealthy?
September 06, 2023
Private markets aren't just for institutional giants; they're a savvy investor's tool for diversification and risk-adjusted returns.
Think less volatility, reduced market correlation, and a portfolio that aims to punch above its weight.
Recognizing this, our members frequently come to us with many questions about private equity. What exactly is it? Why should you, as a retail investor, care about this asset class? And the question most crucial to investment success — how do you get started?
Let’s demystify the world of private equity.
What is private equity?
Private equity is an investment in private companies that are not listed on public exchanges. Through private equity funds, investors take an equity stake in private firms, aiming for long-term capital appreciation.
So, what’s special about it?
Private assets are one of the highest-performing asset classes. Private equity isn't merely a buzzword; it's a powerhouse performer. From 2000 to 2020, this asset class delivered 2.6 times the return of the S&P 500 (source: Preqin). Generally, this alone would be enough to get the attention of savvy investors. But there’s more.
Private equity helps mitigate portfolio risk. You know the value of diversification. Private market investments, being less correlated to public markets, offer an attractive path to risk mitigation, in addition to the potential for higher returns. For example, consider a 40/30/30 portfolio invested in 40% global equities, 30% US bonds, and 30% alternatives. Over the past 15 years, this configuration significantly outpaced the conventional 60/40 global equities/US bonds strategy (source: UBS’s May 2023 Private Market Allocation Guide).
It’s in high demand by savvy investors. Recent reports from world-renowned banks UBS and Goldman Sachs reveal some interesting trends among “smart money investors” like endowments, family offices, and ultra-high net worth individuals. They found that around 45% of these investors' money is placed in alternative investments, with about 25% invested in private equity alone. It's a trend that highlights how these savvy investors are thinking about where to put their money.
Private equity often drives returns through innovation and control. Private equity firms actively manage their investments, driving innovation and organizational efficiency. Many PE funds are either deep industry specialists or operational experts who use their refined experience to transform businesses and take their operations to the next level. This hands-on approach provides an added measure of control - and confidence too. Through Arta, you have access to top-tier private equity managers like KKR, Vista, and Warburg (source: Prequin, by funds raised).
Performance during economic downturns. Studies like this one conducted by Ernst and Young demonstrate that private equity-backed companies have fared better during economic recessions compared to their public counterparts. These periods can offer higher returns too. We see this as particularly important in unpredictable economic environments like the one we’re in now.
It’s no wonder the ultra-wealthy include private equity investments as a cornerstone of their portfolios.
Early investors in private equity funds on Arta’s platform include employees from Google, Stripe, Salesforce, AirBnb, Microsoft, Apple, Samsung, and, of course, Arta team members — for many of the reasons we've listed above.
Investing in private equity is an enticing proposition, often offering substantial rewards. However, it is not without its unique challenges and risks.
As a discerning investor, here are some essential considerations to think about before investing in private equity through investment funds:
Illiquidity: Private equity investments often have long lock-up periods, limiting the ability to quickly sell or exit the investment.
Risk: Like all investments, private equity carries inherent risks. Make sure you understand the risk profile of the specific fund or investment.
Lack of transparency: Unlike public markets, private equity will not provide the same level of transparency and reporting. You’ll need to be comfortable with the reporting schedule of a fund.
Alignment with investment goals: Ensuring that private equity investments align with your overall financial goals, investment strategy, risk tolerance, and investment horizon is fundamental.
Investing in private equity can offer significant rewards but requires a sophisticated approach and a clear understanding of the unique challenges and risks involved. Once you’ve considered these factors, you’ll be well-positioned to make a decision that aligns with your financial goals and risk level.
Technology makes it accessible.
Once, the world of private market investment was exclusive and difficult to access. The barriers to entry were numerous, and the process was cumbersome - think countless hours of time-consuming research and networking to discover opportunities, demanding due diligence, and substantial buy-in requirements, followed by the relentless task of reviewing and analyzing performance.
But the present paints a different picture. Technology has removed those barriers. Arta has redefined the process, giving effortless access to renowned fund managers, at lower minimums too. Today, embracing this strategy to fortify your portfolio is efficient and straightforward.
Private equity investing has never been more exciting or attainable.
If you're an accredited investor (or above) in the U.S. and private equity's potential resonates with you, we invite you to explore Arta's curated private market opportunities or engage with our dedicated membership team.
The future of investing is here, and we’re eager to guide you through it.