Why private equity?

Many investors turn to publicly traded stocks as a source of growth for their portfolios. However, the number of publicly listed U.S. companies has shrunk by over 50% in two decades’ time – from 7,509 companies to just 3,618.¹

Investing in the equity of private U.S. companies may provide an alternative source of growth and diversification.

Size of the PE market

Private equity assets under management have nearly tripled over the past decade, from approximately $1.6 trillion in December 2009 to nearly $4.5 trillion as of December 2019.²

Private equity assets under management²

Many of the world’s largest institutional investors, including endowments, public pension funds and sovereign wealth funds, have allocated a significant portion of their portfolios to private equity. Today nearly two-thirds of institutional investors dedicate a portion of their portfolios to private equity.²

Investment in PE funds was formerly limited to institutional investors and ultra-high net worth individuals due to high investment minimums and suitability requirements. That’s changing as many traditional and alternative asset managers are making the asset class more accessible to individuals. 

Opportunity for long-term performance

Private equity has historically outperformed public markets (small and large cap) over the past two decades.³

Higher returns may be accompanied by increased risk and, like any investment, the possibility of an investment loss. Investing in alternative assets, such as private equity, relies less on publicly available data and more on a manager’s ability to analyze and underwrite its investments. 

Comparison of annualized total returns³

Diversification

Investors have traditionally looked to their stock allocations as the primary source of growth for their portfolios. However, major stock indexes (large cap, small cap and global stocks) offer little diversification benefits as they are highly correlated to each other. Private equity investments may help diversify a portfolio as evidenced by its lower correlation to the S&P 500 Index over the past 20 years.⁴

Correlation to the S&P 500 Index (Jan. 2000–Jan. 2018)⁴

Investor considerations

The equity securities of private companies are often illiquid and issued by below-investment-grade companies. When building a portfolio that includes private equity, financial professionals and their investors should first consider the individual’s financial objectives. Investment constraints such as risk tolerance, liquidity needs and investment time horizon should be taken into consideration.