Have you ever wondered how the most sophisticated consultants and top-rated portfolio managers allocate investments to their large institutional clients?
Maybe not, but You might be surprised to learn that they do things a little differently than the average retail investor. It is possible for many retail investors to assemble similar portfolio allocations, essentially aligning themselves with some of the same top quartile funds in multibillion-dollar institutional portfolios. i don’t know.
The biggest difference is the significant allocation to private market investments, or alternative investments, in institutional portfolios. For example, according to his three reports in 2022, — Preqin Global Private Equity Report, Hodes Weil & Associates: Real estate allocation monitor for institutional investors and UBS Global Family Office Reportt — On average, sovereign wealth funds allocate 28% to private markets, public pension funds 31%, foundations 34%, university endowments 37%, and family offices 38%.
Many individual investors rarely invest in private market investments, but clearly non-accredited investors are usually unable to invest for the following reasons: Eligibility requirements.
However, along with access to a more investor-friendly fund structure, accredited investors have traditionally had access to modest minimum investment amounts, no capital calls, 1099 tax filings, monthly (or daily) pricing, and quarterly liquidity. The situation is changing as it is now possible to purchase private funds, which previously did not exist.
These new alternative investment funds, unlike mutual funds and exchange-traded funds, are not available to all retail investors. However, many accredited investors can purchase these private market investments and gain many of the same benefits as large institutional investors.
What are their advantages? That is, lower volatility and drawdown risk, and higher returns. Historically, many financial institutions have found that blending private market alternative investments with traditional portfolios of public stocks and bonds reduces risk and extends and improves diversification through the addition of an uncorrelated asset class. further found that these alternative investments can consistently provide higher returns.
Annual CAIA Association Performance SurveyFor example, allocations to private equity by national pension funds exceeded public equities by an average of 4.1% per year over 21 years. In his March 2023 Insights publication, “Regime Change: The Role of Private His Equity in “Traditional” Portfolios,” he says: KKR Global Research Institute discovered the following: “For over 30 years, private equity has — on average — Empirically, we achieved an excess return of approximately 4.3% on a net annualized basis. This relationship holds true over time and across regions and cycles. ”
Apollo Global ManagementA May 2023 paper, “Beyond Beta: How to Use Alternatives to Replace Public Equity,” found that private equity outperformed the S&P 500 index by 3.2% annually over a 14-year period ending in September 2022. showed that it was provided. Volatility is 8.7% lower and drawdown is 17.3% lower. Lucifer found that over 36 years, private equity outperformed public equity by 4.7% per year and had 6.5% lower volatility.
If investing in private markets seems scary or reckless, consider that private markets are about 10 times more expensive than public markets. As of April 2022, capital IQ According to the report, 92% of all companies with annual revenues over $100 million are privately held, while the remaining 8% are more commonly known publicly traded companies. In 2018, Kaiser Family Foundation Announcement of “number of private companies by size” It is estimated that there are 7 million private companies in the United States.
However, private companies are certainly less well-known and the private investment market is clearly opaque, requiring investors and their advisors to carefully consider fund-specific data and information. Among private market funds and managers, the dispersion of investment returns by manager is far greater, forcing many accredited investors to hire specialized private market advisory firms with access to top funds and managers. It’s no longer profitable.
Due diligence is essential before considering investing in private market funds, including private equity, venture capital, private credit, private real estate, and private infrastructure.
Another important aspect of privately held companies is that they are not subject to the same SEC regulatory framework as publicly traded companies, allowing management to make decisions based on longer-term, more strategic issues. Private companies are not required to file their 10-Q forms or report their earnings every three months, allowing them to focus on the long term without worrying too much about daily stock price fluctuations. Investors in the private market can also benefit from active participation in the direction, management, and implementation of private companies’ operations.
For example, many private equity fund managers have teams of experienced and skilled management teams, as well as experts in finance, distribution, marketing, sales, artificial intelligence, technology, networking, human resources, legal, robotics, cybersecurity, and other areas. We have knowledgeable experts. . These professionals working for private equity fund managers regularly participate in specific portfolio companies to assist private companies in areas and areas of greatest need, increasing the chances of success for those businesses. I am. — And, in turn, increase the potential for higher investment returns.
While this potential for higher returns exists, it also comes with the potential for higher volatility, lack of liquidity, and lower returns than in public markets.
fund options
Below are some examples of “democratized” private market funds. They are in no particular order and do not constitute a purchase recommendation.
black stoneis the largest private equity firm by assets under management, providing semi-accredited retail investors with access to private real estate and private credit platforms through the firm’s fund structures. bright and BCREDEach.
The minimum investment amount per Blackstone fund is $2,500, there are no capital calls, and 1099 tax reporting simplifies these investments. Qualified purchasers with a qualifying investment amount of at least $5 million can now integrate Blackstone’s institutional investors into the firm’s flagship private equity buyout/drawdown platform. BXPEa recently launched investor-friendly private equity fund targeting individual retail investors.
Kohlberg Kravis Roberts & Companyanother large private equity firm, has a similar structure. KKR Private Market Fund and KKR Real Estate Select Trustboth are generally available to accredited investors with a minimum investment of $10,000 to $25,000.
step stoneis one of the largest allocators of capital in private markets on behalf of institutional investors and offers three funds targeted to accredited retail investors. suprim is a core private market fund that invests in all private asset classes. spring We particularly invest in mid- to late-stage venture companies. Stepstone private infrastructure fund; structurewas recently launched and features daily pricing similar to SPRIM in that respect.
Aresone of the top private credit companies and recently established as ifASIF is a fund aimed at retail investors that has been established since 2004 and is managed by the same Ares Credit Group. Similar in structure to Blackstone’s BREIT and BCRED, ASIF is available to semi-accredited investors with a minimum of $2,500.
conclusion
Certainly for accredited investors who want to adopt an institutional-style portfolio, as many of the largest and most reputable private companies have democratized some of their flagship funds and provided access to accredited retail investors. It’s an exciting time. A shift to private asset classes that were previously unavailable. This allows some investors to better position their portfolios to meet growth objectives, limit volatility and drawdown risk, and protect principal in ways that were previously available only to large institutions. A whole new opportunity to diversify opens up.
To educate retail investors and provide due diligence and access to private funds, wealth managers are leveraging this availability and changing access to private investments to develop best-in-class solutions and service models. I’m excited.
Scott McClatchey is a senior wealth advisor and CFP at Ballast Rock Private Wealth in Carlsbad, California.
