Looking ahead to an uncertain year, there is a very interesting straw in the wind for 2023 in a report by Barron’s magazine: capital inflows into private equity from private wealth and high-net-worth individuals as institutional investors pull back from the asset class. Citing Preqin figures, the report says investment in private equity funds fell by some 42% in the first three quarters of 2022, with the decline expected to continue into 2023. However, Preqin says family offices and high-net-worth individuals, as well as retail investors, are taking more interest in the asset class.
The report also quotes gatekeeper firm Hamilton Lane to the effect that its estimated 29% of private wealth holders who invest in private assets may rise to 46% by 2024. And as so often, private equity’s outperformance against public markets is cited as the main draw.
That’s not to say that now is a bad time to invest in private equity – on the right terms. As underscored by the University of California’s UC Investments’ US$4 billion investment in Blackstone Group’s real estate investment trust, savvy investors appear to be making use of the current climate to lock in very favourable terms from private equity vehicles. Hopefully, wealthy individuals and family offices are doing the same. Given the kind of discounts that have been reported on secondary fund positions, hopefully they can pick up some bargains that will ripen in future years that way too.
Hopefully, because that still doesn’t address the essential question: how real is private equity’s outperformance? Quoting figures from the Equable Institute nonprofit, PitchBook has just warned that “private equity returns are a major threat to pension plans’ ability to pay retirees in 2023”, with quarterly return levels from global pension funds falling to minus 3.2% in the second quarter of 2022. However different the type of investor, that’s not the kind of data point that general partners will want interested private investors to see.
As I’ve said often before, I believe that private equity can occupy a useful place in a portfolio, say around 10%. I don’t believe for one moment that it’s the real antidote to underperformance in other asset classes. I do believe that the conditions which led to such outsize fund growth and build-up of dry powder over the past decade have now fundamentally shifted, and that private equity’s past performance really may not be reflected going forward.
Private money is usually counted as smart money. In this case, I hope so, even if the private wealth owners have plenty to spare. Credibility is an asset that may be easier to burn through and harder to replace than capital, and private equity would probably not like to lose it in front of a very motivated, influential, and personally involved investor audience.
