Invest like the best: finally, Private Equity for you

Investment in Private Equity has traditionally been the investment that the wealthy and the most reputable investors have trusted to grow their wealth and preserve it in the long term.

We all have role models—people or institutions we look up to because we consider them the best and they set an example. In the financial world, these role models would be the large pension plans, sovereign wealth funds, and influential families like the Rockefellers, Florentinos, and Amancios. Traditionally, they have allocated a significant portion of their wealth to Private Equity investment. The best have been doing it for decades: why?

1. Very high returns: Private markets have historically offered better returns than the stock market. If we compare the returns of Private Equity with the MSCI World (the global equity benchmark index), we can see that over various periods, PE has consistently outperformed the stock market.

If we also consider the best Private Equity funds, that is, the top quartile funds (an expert selection we make at Crescenta), we see that the returns are even higher. At Crescenta, our active funds have an expected return of over 15%*.

2. Diversification: Investing in private markets is a completely complementary investment to traditional ones. Including assets with different risks and natures in your portfolio will help you better navigate negative moments while taking advantage of positive ones. This means you can achieve a better risk-return balance.

3. Private equity funds, with their unique characteristics, are an ideal complement for a balanced portfolio that will give you more stability and profitability.

4.  Less volatility: Public markets are greatly affected by all types of events, from rumors to geopolitical events, causing significant fluctuations in company values. Private markets, not having daily liquidity, do not suffer from these swings, so including them in your portfolio will help reduce volatility.

5. Wider range of options: More than 95% of companies are not publicly traded, meaning they remain in private markets. Additionally, companies are taking longer to go public or choosing not to enter public markets at all. From 1996 to 2019, the number of companies going public has fallen by over 47%.

If companies take longer to go public, most of their growth occurs in private markets. Therefore, if you only invest in public companies, you miss out on the significant growth peaks.

We talk about "the best," but who are these investors? How do they invest in private markets? Although each individual must determine the appropriate role of private equity funds in their portfolio according to their profile and objectives, here is how the best global investors invest:

Family Offices and High Net Worth Individuals (HNWI): Due to their focus on wealth preservation and long-term investment, private equity is one of the favorite assets of family offices and high net worth individuals. Globally, 66% of Family Offices have private market investments (Private Equity, Real Estate, private debt...) in their portfolios.

Endowments: These are funds established by institutions such as universities or charitable organizations to invest and grow their wealth. The returns generated are used to finance scholarships, research programs, and other activities.

For example, Harvard's endowment, managed by Harvard Management Company (HMC), includes a significant allocation to private equity (more than 45%). In fact, it was one of the first institutional investors to invest in Venture Capital. In recent decades, it has outperformed the S&P 500 and the 60% equity, 40% fixed income model portfolio.

Sovereign Wealth Funds (SWF) are investment funds established by a government to manage the wealth of that country. They invest with a long-term perspective, which is why investments in private markets usually represent a high percentage of their portfolios. In fact, the trend is that this will continue to increase: over the past decades, it has grown from 12.6% to 28.3% among the 35 largest sovereign wealth funds in the world.

Large pension plans: According to a 2020 Preqin survey, pension plans globally have an average allocation of 8% to Private Equity. Willis Towers Watson (2021) indicates that the largest pension plans in the U.S. tended to have an average allocation of approximately 9%. For example, the California Public Employees' Retirement System (CalPERS) has had an allocation of around 8% to 12% in recent years.

This content is for informational purposes only. It is financial education content provided by Crescenta, with no intention of issuing any type of personalized investment recommendation.

It is not, in any case, an advertisement for any financial instrument, nor a recommendation or offer to buy.

Author

Sofía Cisneros

Communication and content - Crescenta