What The Richest Are Investing In

What The Richest Are Investing In

According to two recent surveys – one by UBS of family offices worldwide (average $1.1B in investable assets) and the other by high-net-worth social network Tiger 21 of its members (average of $100M in investable assets) – the ultra-rich have recently increased their allocations to an asset they have long favored in their portfolios.
 
What is that asset?
 
Private Equity
 
The family offices surveyed by UBS on average allocated 16% towards private equity while the members of Tiger 21 allocated 26%.
 
Investing in private equity can take many forms, but in simplest terms, private equity is ownership in private companies – companies not traded on a public exchange. Investors can either invest directly in individual private companies or invest in a private equity firm specializing in investing in a portfolio of private companies.
 
However the investment structure, the bottom line is that the ultra-rich are drawn to private equities for advantages they maintain over public equities including:

  • Alignment of Interests.
  • Higher Risk-Adjusted Returns.
  • Less Volatility.

 
ALIGNMENT OF INTERESTS –
Many of the ultra-rich have backgrounds as entrepreneurs and executives so they know how to run businesses, analyze deals and understand financials.
 
Private companies offer transparency and access to management not available with public companies.
 
Through this transparency and their ability to interact with management, the ultra-rich can separate the viable businesses from the high-risk ones. They are also able to align their investment goals with those of the companies they invest in.
 
Private equity offers a matrix of investment opportunities across multiple factors including: risk tolerance, timeline, industry, geographic location, etc.
 
Private company transparency and management access allow savvy investors to gather all the necessary data available to make an informed investment decision that aligns with their investment strategies and objectives.
 
The ultra-rich also take pride in their experience and expertise in successfully launching or running profitable enterprises and privately investing in companies; whether directly, or by teaming up with private equity firms, allows them the opportunity to offer their operational expertise to the companies they invest in to ensure mutual success.
 
HIGHER RISK-ADJUSTED RETURNS –
 
The ultra-rich have long invested in private equity as an alternative to the stock market, since growth and returns in the private markets have outpaced those in the public.
 

 
Private equity returns as a whole have outpaced public equities, but the ultra-rich are ultra-rich for a reason – they are supremely confident and that confidence translates to a belief that they can do better than average through due diligence and risk mitigation through diversification.
 
Because private equity offers diversification across a multitude of factors, the ultra-rich leverage these factors to their advantage to maximize returns and to insulate cash flow and appreciation from downturns.
 
The ultra-rich can ride out storms like the COVID-19 pandemic without a glitch or worry by diversifying their private investments across elements such as:
 

  • Industry.
  • Stage of Development.
  • Equity Structure.
  • Type of Return.
  • Holding Period.
  • Geographic Location.

 
LESS VOLATILITY –
 
Private equity is uncorrelated to the stock market and immune to broader market volatility.
 

 
Illiquidity is a major factor in private equity’s non-correlation to the stock market since most private equity investments have lockup periods of a minimum of 3-5 years, preventing investor panic and extreme market liquidations as seen with public equities.
 
Since most private equity investments are restricted to accredited investors, these investors are typically more savvy, immune to herd mentality and can see the big picture better than their Main Street counterparts.
 
This prevents them from panicking in a crisis. This ability to stay the course allows the companies they invest in the room to breathe and grow to reward their investors.
 
The ultra-rich have long known about the benefits of investing in private companies.
 
Transparency allows investors to:

  • Align their objectives with management.
  • Superior risk-adjusted returns.
  • Low volatility due to non-correlation to Wall Street.

 
These are all major factors for why the ultra-rich have always allocated large portions of their portfolios to private equity and are moving even more assets over to this class today amid the current economic crisis.  
 
For many investors, the only economic indicator they need is to see where the smart money is putting their capital. And the smart money is putting their money with private companies.
 
What’s stopping you from allocating more of your portfolio to private equity?

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John Turley

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