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Why invest in private equity?

Private equity: a definition

“Private equity” is the term used for investments made in non-listed companies. It also applies to toehold investments in public companies, made with the view of acquiring a significant stake at a future date and enabling a private equity fund manager to influence management decisions. Private equity financing is sector-agnostic and numerous private equity backed companies are actually global or regional market leaders.

Access to private equity investments is typically provided via a fund structured as a limited partnership and managed by a general partner. The general partner will deploy the money according to a pre-defined investment strategy. During the defined investment period, investors are required to fund capital calls up to their agreed commitment level. The fund will hold each of its underlying portfolio companies until the company is sold to a trade buyer, a financial buyer or through an initial public offering. After the realization of each portfolio investment, the fund distributes the proceeds to the end-investor. A private equity fund winds up after a timeframe of ten to twelve years.

 

An asset class not to be ignored

Private equity aims to deliver premium returns over public equity markets – a compensation for its illiquidity and the higher risk potential of some of the underlying investments. The reality has been very attractive for some investors, such as Pictet & Cie. Top quartile buyout managers have been able to achieve remarkable returns over the past decade and the asset class is now firmly entrenched as a core allocation for institutional investors and high net worth individuals.


Portfolio diversification

The introduction of private equity within a balanced portfolio can improve the overall diversification of a portfolio. Private equity investments have demonstrated lower correlation with returns against public equity and bond markets. It offers a diversification in terms of sources of risk and their performance returns are subject to the intrinsic value growth targeted by the general partners. A private equity fund-of-funds reduces the idiosyncratic risks inherent to investing in a handful of single managers and can be diversified across vintage years, regions, sectors and manager competences.