Private equity as an alternative investment provides institutional investors and high net worth individuals significant benefits compared to traditional public market investments. The illiquidity premium, access to exceptional fund managers, and portfolio diversification lead to higher returns over the long run. Meanwhile, private equity investments riding secular growth trends can bring higher growth rates and lower macroeconomic risks.
Private equity provides illiquidity premiums, resulting in higher returns
Many private equity investments come with illiquidity premiums, meaning investors are compensated with higher returns for locking up capital for 5-10 years in a private equity fund. Top-tier private equity funds have consistently outperformed public equity markets over the past decades. The illiquidity allows private equity managers to focus on long-term value creation without worrying about short-term stock price fluctuations or market volatility.
Private equity provides access to top fund managers with exceptional capabilities
The best private equity managers possess exceptional capabilities in deal sourcing, due diligence, value creation, and exit execution, which lead to investment outcomes unattainable by average public market investors. It takes investors rigorous due diligence and an established reputation as a value-adding limited partner to access such top-tier private equity funds.
Private equity investments provide diversification benefits
The returns of private equity have low correlations with those in public markets, providing portfolio diversification benefits. Investors can capitalize on secular megatrends like healthcare innovation, e-commerce, software/SaaS earlier in a company’s life cycle through private equity, achieving outsized growth uncaptured in public markets.
Private equity investments come with risks requiring active management
While private equity investments provide significant benefits, they also come with risks such as high management fees, lack of liquidity, lack of transparency, and adverse selection by general partners that require active management by limited partners. A disciplined investment process and deep relationships with general partners are key to risk management for long-term success.
In conclusion, private equity provides institutional investors superior returns driven by illiquidity premiums, exceptional fund managers, and diversification. However, the risks call for rigorous due diligence and active management of the private equity portfolio.