The outlook is bright for private equity investing in the coming decade. BlackRock’s central expected return for private equity as an asset class is 11.2% over the next 10 years. For the same time period, BlackRock anticipates a return of 8.8% for U.S. equities and an 8% return for a global, balanced allocation of 60% stocks and 40% bonds.
“Private equity can help generate long-term capital growth and keep investors invested through market downturns,” says Scott Reeder, head of the alternative investment team for BlackRock’s U.S. Wealth Advisory business.
Here are some factors to consider when looking at private equity as an asset class:
- Private equity investing access is expanding.
- More advisors including private equity in client portfolios.
- Private equity outperforming other asset classes.
Private Equity Investing Access Is Expanding
“We are exceedingly bullish on private equity as an asset class for its propensity to drive outsized investor returns in the years ahead,” says Greg Bassuk, chief executive officer for the alternative investments firm AXS Investments. “Likewise, the next decade also will represent the very first period during which financial advisors and their individual investor clients will have as much access to private equity investing as needed to enable the broader investing public to reap the same benefits of private equity exposure as their institutional investor counterparts have enjoyed for years.”
Private equity has been a source of wealth generation for investors for many years. Take, for example, Brookfield Asset Management’s $2 billion deal with Primary Wave Music in October of this year; this stake now includes revenue from a catalog of hit songs, such as “Private Eyes,” recorded by Hall and Oates back in 1981.
Investments in private equities have increased dramatically in 2022. Based on Montana Capital Partners’ 2022 investor survey on the role of private equity in volatile times, more than 7 in 10 family offices and one-third of institutional investors allocated more than 15% of their investment portfolios to private equities. This represents a year-over-year increase of 45% and 59%, respectively.
“We believe private equity exposure is one of the single most important factors that has driven the vastly greater institutional investor (pensions, endowments and foundations) portfolio returns historically, versus the lower historical portfolio returns for individual investors,” remarks Bassuk.
More Advisors Including Private Equity in Client Portfolios
Financial advisors are starting to warm up to private equity as an asset class and include more of it within their clients’ portfolios. A separate investor survey conducted by CAIS and Mercer in October of this year revealed that 88% of financial advisors plan to increase their allocations to alternatives, including private equities, over the next two years. Private equities (73%) represent the largest share of financial advisors’ current allocations to alternative investments, followed by private credit (71%) and real assets (69%).
Still, financial advisors’ frequently cited reservations about alternatives include lack of liquidity (66%), high levels of administration and paperwork (51%), and concerns around due diligence and compliance (42%), according to the CAIS-Mercer survey. Many of these concerns, however, have been addressed with the advent of mutual funds that include private equity investments.
“Financial advisors and their individual investor clients can now access private equity returns in a mutual fund vehicle, which democratizes private equity investing by enabling a daily liquid, fully transparent, low-cost means of accessing private equity returns,” says Bassuk.
Reeder cites the advantages of an established investment process and adds, “The scale of deal sourcing, investment due diligence, and operation due diligence is critical to achieving long-term success and principal growth.”
Long-term success and principal growth can be measured in a variety of ways, but the outcomes that typically make sense for individual clients – and their financial advisors – are above-average returns without undue risk and a smoother ride in short periods when the market seems to lose its way.
Private Equity Outperforming Other Asset Classes
State pension plans have recognized the returns of private equity. A report released in September 2022 by the investment research firm Cliffwater provides insight into what helped state pension plans successfully navigate risk and achieve above-average investment returns over the last 21 years. The report includes 65 state pensions’ portfolio weightings to fixed-income, domestic and international equities, real estate and private equities. Following the financial crisis in 2008, state pensions significantly increased their allocations to alternative investments, including private equities, from an average of 10% to 21% by 2011, and as much as 33% in 2021. Among all the asset classes, private equities provided state pensions with the highest average returns in both the 21- and 10-year periods – 11.03% and 15.53%, respectively.
By comparison, state pensions captured average returns of 6.3% from U.S. equities, 4% from international equities and 5.8% from fixed income over the last 21 years. While the inclusion of private equities was a positive outlier for state pensions, Cliffwater also found that the way this asset class was implemented in portfolios was also a “critical factor” in historical outcomes.
If the capital-market expectations from BlackRock bear out in the coming decade, significant questions will emerge about how financial advisors construct portfolios for their clients, such as:
- What kind of returns will clients need to survive – and thrive – throughout retirement?
- Looking ahead, which asset classes are in a better position to potentially help clients capture the level of returns they need over time?
- What are some practical ways to look into and implement alternatives, such as private equities, for the benefit of clients?
The benefits of private equity as an asset class have gained ample attention in recent years. Perhaps, over the next decade, the risk-reward paradigm for financial advisors may shift from whether to include private equity in their clients’ portfolios to what it may look like to own more of it.