As an investor today, you have access to wealth-building and income-generating opportunities that were previously available only to a small circle of wealthy individuals and institutions. One category of opportunities that have become accessible in recent years to average investors are private equity investments.
Of course, just because you have access to a new type of investment vehicle doesn’t mean you should invest in it, even if it has long been a favorite among high-net-worth individuals and sophisticated investment institutions. So, the question is: Should you allocate a portion of your investable capital to private equity? Having seen firsthand the ability of private equity investments to deliver outsized returns consistently – in fact, having delivered such returns ourselves to investors for more than a decade – we believe you should.
In this article, we’ll discuss a few of the benefits of investing in private equity opportunities.
Strong risk-adjusted returns
Private equity investments, such as private equity real estate funds, have historically generated high risk-adjusted returns relative to other asset classes such as stocks and individual real estate investments. This is why such a wide range of institutions, from pension funds to sovereign wealth funds, invest in private equity.
In its 2018 “Investing in private equity” report, JP Morgan Asset Management notes that a well-implemented private equity portfolio may achieve returns that are 4% to 5% above that of public equities over the long term.
Moreover, according to a 2018 report from consulting firm McKinsey & Company, called “The rise and rise of private markets,” 91% of limited partners (such as pension funds) believe private equity will continue to outperform the public markets, a trend they have seen consistently for years. The report also points out that many investment consultants have the same forecast. This helps explain why, as the McKinsey report documents, private-equity funds continue to raise new capital at an impressive rate, with global private markets – now holding more than $5 trillion in assets under management.
Portfolio diversification and lower volatility
Because private equity funds are by definition not publicly traded, they do not tend to move in lock-step with the public markets. That means these types of investments can offer diversification for investors who are also invested in stocks, and they can serve as a helpful hedge against public-market volatility.
What is interesting about this advantage is that it represents the flip-side of perhaps the most widely cited concern about private equity investment opportunities – namely that they lock up investors’ capital for several years and are therefore highly illiquid investments. While this is true, this multiyear investment commitment also means these funds are far less subject to the wild up and down swings that characterize so much of the public-equities markets.
Aligned interests of fund managers and investors
Another advantage of private equity is that because the underlying assets are privately owned and operated by the fund’s managers, and because these funds are not frequently traded on an open exchange, they tend to better align the interests of managers and investors than do public companies. The senior leadership of a publicly traded firm, for example, might be under continuous pressure from shareholders to boost the company’s valuation in the short term. This can lead a public corporation to make strategic moves that are actually counterproductive to its fundamental, long-term well-being.
Private equity managers, by contrast, do not generally operate under such urgent and constant pressure from their investors demanding short-term gains. Private equity real estate funds, for example, are able to make strategic decisions – waiting for the right time to buy properties, searching for the right real estate markets, etc. – that will grow the fund’s bottom line and income-generating potential over time, but not necessarily increase its “share” price immediately.
In the long-run, then, the managers who operate private equity investment opportunities are actually better positioned to run their funds in ways that benefit their investors.
Learn more about a proven private equity investment opportunity
If you’d like to learn about a private equity investment opportunity from a team that has delivered an annualized 30% return to its investors over the past decade, let us introduce you to The Worcester Fund from Worcester Investments, a private equity real estate fund from the trusted name in Kansas City multifamily real estate.
This does not constitute an offer to purchase securities, and that any purchase may be made only through delivery and receipt of a confidential private placement memorandum from the issuer, pursuant to which any potential investor must complete and provide an investor questionnaire, subscription agreement and other things required by the issuer, and are subject to the issuer’s verification of accredited investor status and issuer’s acceptance of the subscription