By Claire Sawyer, Associate Director of Content Development, CAIA Association
We know how it goes: you register for a webcast with the best of intentions, but when the day comes, your schedule’s full or you just can’t bring yourself to spend another second (let alone a full hour) on Zoom. We know the feeling All Too Well. If you Would’ve, Could’ve, Should’ve tuned in for our Private Equity Investing: Growth, Trends, and Expectations webcast, but life got in the way, we’ve got you covered.
Growth & Democratization … Ready for It?
Discussions around private equity are continuing at a fever pitch, and with such a large opportunity set, it’s not hard to understand why. As presenter Cameron Joyce, Head of Research Insights at Preqin shared, 62.9% of US companies with revenues over $1 billion dollars were private at the end of 2023. For US companies with revenues over $1 million, it was 88.9%. Said differently, only 11.1% of US companies with revenues over $1 million dollars were accessible in the public markets at the end of 2023. Whether this trend of capital formation shifting to private markets will continue remains to be seen, but it’s not hard to see why investor interest in private equity has grown over time.
This is particularly true in the wealth management space, where interest has been fueled by one of the key topics discussed during the webcast: the emergence of semi-liquid fund vehicles, which offer a different approach to accessing these strategies, as opposed to the traditional drawdown structure we typically associate with private equity. As one of our panelists, Michael Bell, CEO, Meketa Capital, explained:
“Interval funds and tender offer funds are the vehicle of choice that are really opening up the private markets to wealth management, really serving as the lead vehicle that is democratizing access to private markets, whether it’s private equity, real estate, credit, or infrastructure.”
It makes perfect sense that these vehicles would appeal to the wealth management space, given their liquidity mechanism and lower investment minimums, both of which can exclude or dissuade investors from traditional drawdown funds. They can also help investors achieve their desired private equity allocation more quickly than a drawdown fund, offering the ability to be fully invested for longer. Evergreen funds, in theory, offer solutions to the characteristics of drawdown funds that are often viewed as drawbacks for investors in the wealth management space. But they’re not without their own drawbacks. Private equity is, at the end of the day, an illiquid asset class, which may create a mismatch between the liquidity of these fund vehicles and the liquidity of the underlying assets. As Gregory Garrett, Managing Director, Portfolio Advisors succinctly put it:
“There are different strategies and structures in place in private equity, and it’s not just one size fits all…you need to take a look at the underlying strategies within any of these structures to understand your risk profile and return potential.”
The liquidity offered by evergreen funds is also not ubiquitous – redemptions are periodic and limited, and liquidity comes at a price – in this case, additional fees. While innovation and optionality are generally good things, the flexibility offered by these fund vehicles doesn’t mean they’ll necessarily be a good fit for every client.
Secondaries: Getaway Car to End Game
Another (related) topic of discussion was the continued growth and evolution of secondaries. Once viewed as a last resort or, as panelist Phil Huber, Managing Director and Head of Portfolio Solutions, Cliffwater remarked, a “break glass in case of emergency” solution for distressed sellers, secondaries are now more accepted as effective portfolio management tools for both LPs and GPs, offering a variety of potential benefits like shorter duration, the potential for attractive entry points, and the ability to step into a seasoned portfolio. Like the relationship between evergreen funds and drawdown funds, secondaries may offer so-called solutions to the perceived problems associated with primary investments. As Phil noted while highlighting the relationship between secondaries and the adoption of evergreen fund vehicles:
“It’s worth noting that this growth of secondaries coinciding with the growing adoption of evergreen structures – that’s not an accident. In fact, secondaries have been kind of the accelerant that, in many ways, has made possible the implementation of these evergreen structures. The inherent liability mismatch that would come with trying to do a more traditional, primary based approach inside of a semi-liquid vehicle just doesn’t really work well, so secondaries have been a way to help facilitate that in an efficient manner.”
But like evergreen structures, secondaries are not a catch-all solution. These transactions may come at a premium that reduces potential return, and there may be limited access to information about the underlying assets, making due diligence more challenging. Risks and trade-offs are involved in every investment decision, including secondary transactions, and they must be evaluated relative to the specific needs and priorities of the client.
The Client Experience: You’re (Not) on Your Own, Kid
Which brings us to another important theme throughout the discussion: how to provide the investment experience that your client is looking for. It’s not an easy thing to do as the universe continues to expand – with more managers and funds to choose from, due diligence and manager selection continue to be some of the most important components of a thoughtful allocation to private equity. This is especially true when you consider the difference in performance between top and bottom quartile managers and the fact that many top managers are closed to new investors. If you end up with a bottom quartile manager, depending on the fund structure, you may be stuck there longer than you’d like. The manager’s investment strategy, operational and due diligence capabilities, and track record in the space are just a few of the many factors to consider.
Putting it All Together: Long Story Short
Private equity investments have the potential to offer a host of benefits but, like any investment, they come with risks and should not be entered into blindly. If we had to summarize the key takeaways from this discussion:
Nothing in private equity is one-size-fits-all, and everything should be evaluated relative to the needs and preferences of the client.
It’s essential to consider the characteristics of both the fund vehicle and the underlying assets. Understand the benefits and limitations of both and how those factors relate to one another.
Due diligence and manager selection are make-or-break considerations and should be a top priority, especially for the wealth management space.
To hear our panelists’ thoughts on performance measurement in private equity, including comparing fund performance between evergreen and drawdown vehicles, check out the full recording below.
About the Contributor
Claire Sawyer is Associate Director of Content Development at CAIA Association. Prior to her current role, she served as Program Manager and Relationship Manager for the UniFi by CAIA™ learning platform. She holds the Sustainability and Climate Risk (SCR) certificate from GARP and is a Level 2 CAIA Candidate. She earned a BA in Legal Studies from UC Berkeley.
If you’d like to learn more about Private Equity, check out the UniFi by CAIA™ Private Equity Microcredential. The program is free for CAIA Members, and discounts are available for students and corporate clients. Questions about the program? Reach out to us at unifi@caia.org