Craig Brooke from KeyInvest speaks to James Dunn from The Inside Network on finding the cream of private credit crop. The Inside Adviser
Clearview and trustee ETSL have raised eyebrows and confused advisers by shifting the popular WealthFoundations super and pension product to investment platform provider HUB24. “It’s like a power plant being run by a battery,” says adviser Jason Poole. “It makes no sense.”
Private equity opportunities may offer recession buffer, with some risk
More and more institutions are investing in private equity, and retail investors are expected to follow lured by potentially higher rewards than listed equities, and resilient returns after a recession, according to the experts. But with greater reward also comes greater risk.
For retail investors, there are several options to access private equity investments, including through retail and wholesale managed funds and exchange traded funds. However, managed funds typically may charge a higher fee than regular equities funds due to the greater research and analysis required to source profitable private equity opportunities.
Private equity investment can involve buying an equity stake in a growing business, granting loans to companies or it can involve buying a private company either through outright purchase or a controlling equity stake, known as a buy-out. Venture capital involves funding the growth of companies in the early stages. Returns are generally higher, though risk can be too, and liquidity is less, according to Felicity Thomas (pictured), a senior private wealth adviser with Shaw & Partners.
“Private equity allows investors access to alternative asset classes and investment opportunities that they usually wouldn’t have access to like property syndicates and infrastructure… companies are staying private for longer, particularly in this current climate. So, with private equity, investors are able to get into these opportunities at lower multiples and therefore [capture] more upside,” Thomas tells The Inside Adviser.
“The risk or negative I see is that your funds are locked away for five to 10 years, however, that is generally not an issue in a self managed superannuation fund when [investment] time horizons are longer. You just need to be aware and comfortable with the lock up term.”
Time to ride out recession
Alternatives director at Schroders, Claire Smith, says private equity can offer investors several advantages over listed shares, and returns can help to ride out share market volatility and economic recession. “The benefits of private equity have typically included offering higher returns than listed markets, greater portfolio diversification and typically at a lower volatility,” she says.
According to Schroders, private equity funds also benefit from ‘time-diversification’, where capital is invested in companies over several years. This allows funds raised in recession years to pick up assets at depressed values as the recession plays out. The assets can then pursue an exit later on, in the recovery phase, when valuations are rising.
For example, the average internal rate of return of private equity funds raised in a recession year has been over 14 per cent a year, based on data since 1980, as the chart below shows. This is higher than for funds raised in the years in the run-up to a recession.
Schroders’ Institutional Investor Study 2022 found that the two main reasons for investing in private equity were to ‘generate higher returns than public markets’ (76 per cent of respondents voted positively on this point), and ‘diversify your portfolio’ (70 per cent of respondents responded positively on this point).
Access through managed funds
Retail investors can now access private equity investments through actively managed funds and exchange traded funds. Investors can also get access to the sector through some superannuation funds which are increasingly allocating more to private equity.
However, managed funds typically may charge a higher fee than regular equities funds due to the greater research and analysis required to source profitable private equity opportunities.
“In the listed equity market all company data is publicly available and fund managers or individuals with a share trading account can assess this publicly available information, run their analysis and then buy and sell companies over the stock exchange depending on their view of the company,” explains Schroders’ Smith.
In terms of superannuation, one of the nation’s most prominent private equity investors is AustralianSuper. The nation’s largest superannuation fund will invest $13 billion into private equity globally over the next two years to help deliver strong long-term returns for members. The super fund recently said it will increase its allocation to private equity to 7 per cent by 2024 from 5 per cent in May 2022 as part of its strategy to increase its investment in unlisted assets.
