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We believe private equity (PE) to be a very exciting asset class to invest in, especially in current times. For a start, PE has been growing steadily for years, providing on average higher returns than other asset classes in the long term, and rewarding investors with an illiquidity premium for their long-term commitment. Over the past years we’ve witnessed a very strong fundraising environment of more than USD 600 billion p.a., with an equally strong investor demand.

Further, diversification is another benefit of PE, which not only can improve returns but also decrease volatility. Market volatility and uncertain economic scenarios usually pave the way for investors to enter this asset class, as well as favor higher returns. This has been the case historically, as volatile vintage years marked by economic uncertainty represented entry points to PE, along with strong relative returns. We saw this both during the dot-com bubble in 2000 and the GFC some years later, where PE opportunistically took advantage of cheaper entry-level valuations.

Private equity allows investors to access a broader investment universe of unlisted companies, which is not the case for public markets. These companies are often young and innovative and operating in high growth markets. Another key argument for investing in PE is the active value creation. Most of PE returns are derived from increasing revenue, increasing profit margin or strategic repositioning – which is typically achieved through the actions of fund and company management that are properly aligned on that outcome. That skill-based element adds to any large, diversified portfolio an additional return creation level.

Typically investors diversify by region and investment stage. Investment stage typically comprises of venture capital, growth capital, buyout and special situations. Each of the stages then is subdivided, (e.g. for buyout into small, mid, large and mega). Each of these subcategories have different risk/return characteristics and return drivers. Another diversification angle is by investment type (i.e. primaries, secondaries or co-investments). Secondaries for example are a great solution for those investors wanting to mitigate the J-curve, have lower risk and a more diversified portfolio early on.
There are broader and focused fund-of-funds (FoFs).

Focused FoFs typically provide access to a specific region or strategy that are hard to access for investors, because they are lacking the skill, team capacity or capital for that niche. Broader FoFs typically cover a couple of regions or strategies and often investors can pick and choose from an investor menu according to their taste. The latter typically are invested by smaller and mid-sized investors who can’t afford a dedicated PE investment team at all. So both FoF types fulfill a need for certain investors. FoFs today are also very different compared to 10 or 20 years ago.

Today most FoFs invest across a range of primaries, secondaries and co-investments. To embrace those changes today many FoF-Managers refer to themselves as multi-managers. Secondaries help to accelerate portfolio build-up, boost early returns and diversify the portfolio early on. They are also a great tool to round out the portfolio and exploit market opportunities.