The capital markets are often portrayed as the stock markets only but private markets are important as well. Especially if you think about the fact that (almost) every company, before it becomes a public company, has to be started and developed as a private one. For private investors, it’s not easy to participate in Venture Capital and Private Equity. It might also not be wise for most to invest in high risk startups and most funds have a minimum investment amount that makes it an exclusive club anyway. However, as we’ll see later, there are sensible options to invest in Private Equity at large for any type of investor.
Every investor, from institutional corporations to the private investor with a savings plan, should have some exposure in the private markets, I’d argue. Asset allocations can and should of course vary, but I don’t see any reason to turn a blind eye on this asset class. When it comes to returns, Private Equity as an asset class has had a significant premium historically globally and still shows a clear outperformance in Asia and Europe over the last years. Just in the US, the spread between public and private equity has narrowed and converged.
This comparison in the Bain & Company Global Private Equity Report 2020 shows the 10-year annualized IRR in the US and Europe. While we shouldn’t make future predictions, it’s clear that investors can’t overlook returns in this asset class.
The latest 2020 McKinsey Global Private Markets Review highlights some very interesting facts about the rapid growth of assets under management (AUM) and the distribution of Private Equity globally.
„PE has changed as it has grown. Buyout funds comprised nearly 75 percent of the total in 2010 but represent just over half today, as VC and growth AUM have taken off. Buyout has grown quickly, but a tremendous rise in Asian VC and growth funds has tilted the balance. While Asia represented only 12 percent of global venture-capital AUM in 2010, it now constitutes over 40 percent, about the same size as North America. In growth capital, Asia has already overtaken North America, accounting for 60 percent of the market compared with North America’s 26 percent.“
„Global PE net asset value has multiplied eight times since 2000, almost three times as fast as public market capitalization, which has grown approximately 2.8 times over the same period (Exhibit 11). Yet it is important to keep in mind that even after two decades of torrid growth, private market AUM remains miniscule next to public markets, coming in at less than 8 percent of total public equity market capitalization and 3 percent of public debt.“
These facts demonstrate the rapid growth of assets under management by private equity companies and the strong position of Asia, especially in Growth but also in Venture Capital. However, at 8% relative to public markets, the private market is a small but still relevant area. With that ratio in mind, I do think it’s reasonable to invest up to 10% of one’s assets in Private Equity. I personally would exclude real estate investments from those 10% and treat real estate as a separate asset class with its own allocation.
„Of course, passive investment in PE isn’t yet feasible for most investors—there is no ETF equivalent for the asset class.“
I don’t quite agree with that statement in the McKinsey report. While options for private investors are certainly limited because private markets are not easily accessible – especially not with small investment tickets – there are still a few out there. A good example in my opinion is the iShares Listed Private Equity ETF (IE00B1TXHL60) managed by Blackrock.
This ETF consists of around 60 PE companies including heavyweights such as 3i, Blackstone and Carlyle. Indirectly through that ETF, we own shares on German SMEs through DBAG, are part of massive real estate deals done through Blackstone or own companies like Action through 3i.
While a total expense ratio (TER) of 0.75% p.a. is on the higher end for a passive ETF, it always has to be put in perspective to how closely the fund performs to the index it represents. Since inception in 2008, this specific ETF showed a negative tracking difference (TD) of -0.52% which means that an investor actually did not pay fees but performed better than the index after fees. This ETF combines both worlds: exposure to private companies and liquid assets through the public markets.
January 6th, 2021