Private equity (PE)

Learn about investing in the equity of private U.S. companies for potentially higher growth and diversification.

Private equity (PE)

Learn about investing in the equity of private U.S. companies for potentially higher growth and diversification.

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 more than doubled over the past decade, from approximately $1.6 trillion in December 2009 to nearly $3.6 trillion as of December 2018.²

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)


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.

  • The National Bureau of Economic Research, “Eclipse of the Public Corporation or Eclipse of the Public Markets?,” 1997 peak to year-end 2016.

  • Preqin, Alternative Assets: 2019 in Review and Looking Ahead to 2020; Preqin Quarterly Update: Private Equity and Venture Capital Q3 2019. Latest data available.

  • Private equity is represented by the Cambridge Associates U.S. Private Equity Index. Small cap stocks are represented by the Russell 2000 Index. Large cap stocks are represented by the S&P 500 Index. Past performance is not indicative of future results.

  • Private equity is represented by the Cambridge Associates U.S. Private Equity Index. Small cap stocks are represented by the Russell 2000 Index. Large cap stocks are represented by the S&P 500 Index. Global stocks are represented by the MSCI World Index. Past performance is not indicative of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

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