Private Equity: Should it be a part of your portfolio?

You may have heard about private equity but also may not know very much about it. Many investors are not aware that by investing only in the public equity markets, or those companies traded on public exchanges like the Nasdaq or New York Stock Exchanges, they could be missing exposure to companies driving a material amount of economic activity. In fact, there are approximately 21,000 companies with annual revenue greater than $100 million in the United States, and a full 85% of those are private companies not traded on the public exchanges.

While adding private equity to your portfolio may seem like a great idea, there are barriers to entry. For example, as an individual investor you cannot just call up a private company and ask to invest. They likely wouldn’t take your call. Instead, you might invest in a private equity fund through an investment advisor who has a private equity offering through connections with large broker dealers or banks.

In addition, there are certain eligibility requirements an investor must meet to qualify for a private equity investment. In some cases, an accredited investor status is needed. This means that an individual needs to have a net worth of at least $1 million, excluding their primary residence, or annual income of $200,000 for the past two years or $300,000 if married. Even still, some investments require a qualified purchaser status. This means an investor would need to have at least $5 million in investment assets to qualify.

These parameters are in place for a reason. While investing in private equity investments might offer many benefits, such as increased diversification, a potential return premium above public markets and less volatility, there are also some considerations on the flip side. There tends to be less volatility with private equity, partially due to less frequent reporting, which also comes with less visibility into how the investment is performing day to day. In addition, private equity investments are typically less liquid than public equity and can be riskier.

Private equity continues to evolve and has become much more accessible to individual investors in many respects. There are several different kinds of private equity ranging from co-investment funds to primary and secondary investments. In addition, in contrast with more traditional private equity investments where your committed funds are called in overtime and are tied up for almost a decade, there are also evergreen funds available. These funds allow for more frequent opportunity for sale of the fund, sometimes as often as monthly. In addition, the capital you commit is often invested all at once rather than called in over time.

While private equity can make sense for a lot of investors to add a potential return premium and layer of diversification to their portfolio, there are also other considerations specific to the individual. At Heritage Wealth Architects, we have access to a private equity lineup that is refreshed as new funds become available that we think can produce worthwhile results for our clients. We do our homework on potential offerings both at the fund level and in the context of individual client situations. Please contact us with any questions about how private equity might fit into your portfolio by reaching out to any member of our team.

Sources: A Cartoon Lover’s Guide to Private Equity by David M. Toll

1 S&P Capital IQ, as of August 31, 2022. Analysis by J.P. Morgan and within the JPMF presentation