Investors hunt for returns and find private equity. The asset class continues to outperform public markets. And individuals become an increasingly important source of capital.
Moonfare has identified three trends in the private equity industry that we expect to continue and accelerate in the new year.
For a more detailed look at private equity heading into the New Year, please take a moment to review our latest white paper, “What Now?”
The pandemic and its fallout will once again transform markets in 2021, as the combination of fiscal and monetary policy continues to affect returns in publicly traded assets like stocks and bonds.
In the case of stocks, valuations have pulled away from the fundamental data presented on companies’ balance sheets and income statements to focus far more on the narrative, decoupling market capitalizations from intrinsic value. Monetary policy encourages this trend. One result: stocks are more expensive than ever.
Bonds are no longer a good hedge, with yields bottoming out and a correlation to equity increasing substantially, removing the diversifying benefits of this lower risk asset class.
Smart investors will in 2021 continue looking for ways to outflank these dynamics: They will want to invest in fundamentals and intrinsic value while diversifying their portfolios and avoiding volatility. These investors will increasingly take advantage of new access to invest in private markets.
By the numbers, the retail demand for alternative investments is expected to be up by more than 15% in 2021 from 2019, according to Blackstone. Within alternatives, the global AUM for private equity is expected to overtake hedge fund AUM by 2023, to become the preferred alternative asset.
At Moonfare, we’ve seen the growing demand for private equity first hand. The average portfolio is around €500,000, with more than 50% of our clients investing in more than one fund and more than 25% holding three or more funds. Around half of the new AUM on Moonfare’s platform comes from repeat investors increasing their exposure, a trend we expect to continue this year.
At Moonfare, we’ve seen the growing demand for private equity first hand. The average portfolio is around €500,000, with more than 50% of our clients investing in more than one fund and more than 25% holding three or more funds.
Private equity has delivered higher returns and lower volatility than public markets over the past two decades. Funds launched since the global financial crisis have been strong and consistent in totality. Faced with a pandemic-driven economic dislocation, we are in prime time for new funds that could potentially set a new high watermark for fund performance.
Faced with a pandemic-driven economic dislocation, we are in prime time for new funds that could potentially set a new high watermark for fund performance.
Private equity investment is about finding fundamental value in good companies. But as we saw this year, even good companies can become distressed, with profits battered by Covid-19 and entire industries like hospitality, travel and some retail forced to largely shut down.
Investment is never just about buying low: It is also buying the right business at the best price and the right time. Some of the strongest performing private equity funds have launched during economic downturns, where advantageous pricing dynamics can emerge (e.g. fewer buyers in the market, distressed sellers). Take 2009, in the aftermath of the global financial crisis, when the average purchase price multiple for leveraged buyout transactions in the US was lower than in any other year between 2006-2019.
More than ever, the management expertise of private equity will add value. Research by McKinsey & Company found that fund managers who operated a dedicated value-creation team outperformed in crisis years, with 5 percentage points more in terms of internal rates of return (23%) than fund managers without (18%).
CA Private Equity (PE) Index as sourced by Cambridge Associates’ Q2 2020 “Private Equity Index and Selected Benchmark Statistics” report. The Cambridge Associates Private Equity Index is a pooled horizon IRR calculation based on quarterly data compiled from 2,296 private equity funds (buyout and growth equity), including fully liquidated partnerships, formed between 1986 and 2019.
S&P 500 Total Return Index as sourced from Yahoo Finance. S&P 500 TR Index data are annual compounded return calculations which are time weighted measures and are shown for reference and directional purposes only. The CA PE Index is not an investable index and is used solely for illustrative purposes. The CA PE Index includes only Buyout and Growth Equity funds which matches the investment opportunities currently offered by Moonfare.
However, it is within Moonfare’s rights to offer additional private market strategies in the future. Due to the fundamental differences between the two calculations, direct comparison of IRRs to time weighted returns is not recommended.
The chart shows the net growth of a $100,000 hypothetical initial investment in the referenced indexes on December 31, 1999.
Index data does not include the effect of Moonfare’s feeder fees, that are levied on top of the private equity funds offered and are estimated to decrease their net returns by c. 2.3% on an annual basis. For this purpose we also show on the chart a hypothetical Private Equity Index whose performance includes the impact of Moonfare fees.
The investors who once relied on private equity firms to manage their money are increasingly managing it themselves. We expect to see more pension funds raising third-party capital themselves and, as a result, the influx of retail capital into private equity to continue accelerating.
The shift towards a more hands-on investing role is nothing new for big institutional investors who traditionally allocated to private equity funds. Private equity allocators have been more involved in co-investments and building their own portfolios for the past decade, while the number of direct-investment deals grew 16% on average per year from 2009 to 2017.
This kind of active strategy profits from tailwinds in the industry. Fund managers are increasingly avoiding club deals — when multiple funds tag team an investment — and instead seeking exclusive control over their targets, while co-investment funds like AlpInvest capitalize on the gap by offering capital and expertise without insisting on control.
Now, with the growing combination of regulatory support, platform solutions — like Moonfare — and return-seeking investors willing to face some illiquidity, the path for individuals to allocate to private equity funds and fill the funding gap left by institutional investors running their own portfolios is becoming clearer every day.
The competition for best deals in private equity is fierce and with rising valuations, fund managers are turning to increasingly sophisticated operational improvements to create value and boost returns for investors.
2021 capped a five-year run that saw $1.8 trillion netted in new buyout capital. That makes it the second best year in the industry’s entire history. To put it bluntly, the pandemic was good for Private Equity.
Jochem Theunissen, a Dutch investor and a chief financial officer at a banking-as-a-service platform Vodeno, talks about his decision-making as an investor, the opportunities he sees in the market and the appeal of private equity. “The fact that the investments come with a longer hold gives me ease of mind,” he said in a conversation with Moonfare.