Trends Watch: Private Equity for Retail Investors
April 28, 2022
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Sheryl Schwartz, CIO, ALTI Financial.
What is your outlook for PE?
The long-term growth of the private markets appears to be on an upward trajectory as more companies are remaining private for longer, institutional investor demand remains strong and performance of first and second quartile managers has consistently outperformed public equity indexes.
The Preqin market update in January 2022 stated “it is estimated the growth of Alternative assets will accelerate over the next 5 years. AUM in Alternatives grew from $7.23tn at the end of 2015 to $13.32tn at the end of 2021, or a growth rate of 11.2% for 2010-2020. This compares with a private equity forecasted growth rate of 15.9% between 2021 and 2026, taking Alternatives AUM to $23tn in 2026. The largest component of the growth of Alternatives will be private equity.”
This will be driven by many factors but the most important one is that first and second quartile private equity have historically had higher returns than publicly listed equities and have a relatively low correlation to public equities, thus creating diversification benefits.
What are the greatest opportunities you see and why?
The greatest opportunity I believe is to open access to the private equity asset class to the retail market. Currently the asset class is mostly limited to qualified purchasers ("QPs”) which eliminates most retail investors. Unfortunately, due to regulatory restrictions, minimum sizes, illiquidity and lack of access, retail investors that are not QPs are unable to access most private equity opportunities, which are a large part of the investable market and wealth creation opportunity. While there has been some progress in the creation of product for accredited investors, the vehicles in market do not provide the same fees or product structure as institutional products. Given the low interest rate environment, the traditional 60/40 portfolio that has historically been recommended has not been able to meet the long-term return requirements needed by most investors.
Most retail investors are limited to investing in public companies and the number of publicly listed companies is declining whereas the number of private companies is growing. Specifically, according to Jamie Dimon in his 2021 annual report letter to shareholders, “U.S. public companies peaked in 1996 at 7,300 and now total 4,800. Conversely, the number of private U.S. companies backed by private equity companies has grown from 1,600 to 10,100 — a remarkable increase.”
As a result, leaving private equity out of a portfolio essentially means excluding the vast majority of investment opportunities in the market.
This is not expected to change going forward since companies are choosing to stay private longer because they dislike the regulation, cost and heavy reporting of being public and they prefer to focus on long-term objectives instead of short-term market volatility. There has also been significant growth of private capital focused on late-stage venture and growth companies which permits companies to access capital without the burdens of being a public company. Overall, there are many impediments to small and medium-sized companies being publicly listed.
What are the greatest challenges to a retail accessible product?
The greatest challenge is designing a product that can overcome the objections of retail investors while satisfying regulatory constraints. Specifically, a product for retail investors needs to have more liquidity, a process that does not require time-consuming account opening and subscription documents, less frequent capital calls, lower minimum investment, sufficient diversification, an open path to retail investors below the QP threshold, and the ability to access top institutional quality private equity deals sufficient to build a diversified portfolio without significantly higher fees/carry. It is challenging for retail investors to access a diversified portfolio of top-quality private equity as minimum investment levels are often $10 million and top managers are often oversubscribed and not open to new investors. In addition, fees can be extremely high in certain products for accredited investors due to multiple fee layers, which counteract outperformance.
What keeps you up at night?
Geopolitical and terrorism risks keep me up at night as they are outside of my control. I can build a top-quality portfolio of private equity diversified by GP, vintage year, and industry and obtain access to institutional quality deal flow, but I cannot control geopolitical events. Fortunately, I am investing for the long term with expected average holding periods on investments of five years, which facilitates the ability to wait out market dislocations. One of the benefits of private market investing is the ability to hold on during uncontrollable cycles and dislocations such as a pandemic as long as the investment is properly structured and has sufficient liquidity. High quality managers and deals can perform well in any market, take advantage of dislocations, and have the skills and network to execute on a value creation plan to guide the portfolio through all market environments.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.