In 2024, investors continue to navigate a challenging landscape marked by fluctuating monetary policies attempting to balance the imperatives of growth and inflation management. Victoria McGurran writes
This macroeconomic uncertainty casts a shadow over the appeal of traditional assets like bonds and listed equities.
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Consequently, the alternatives market, notably private equity, has emerged as a compelling option for experienced professional investors. In light of the uncertainty surrounding traditional assets, investors are increasingly looking to supplement their private equity fund investments with a deal-by-deal approach. This strategy can offer greater flexibility, allowing for targeted investments in specific companies and sectors to align with individual investment objectives.
Resilience of the alternative market
As investors look to make their portfolios more resilient, they are seeking to access alternative assets as a means to mitigate volatility and improve risk adjusted returns amidst an uncertain economic outlook. Financial data provider Preqin reports that the assets managed by private capital funds in Europe increased near fourfold in the decade leading up to 2021, with an anticipated annual growth rate of roughly 11% continuing forward.
A study by the US-headquartered Chartered Alternative Investment Analyst Association (CAIA) reveals that over a 21-year time period ending in 2021, private equity allocations by state pensions yielded an impressive 11% net-of-fee annualised return. This surpassed the 6.9% annualised return typically earned through investments in listed equities by a margin of 4.1%.
Advantages of a deal-by-deal approach to private equity
Although the basic investment case for private equity is strong, gaining access to such deals outside the institutional sphere is not so straightforward. New entrants to the market have increased the access non-institutional investors have to private equity funds. However, for experienced investors, accessing these investments through a deal-by-deal approach, such as offered by private market specialists such as Maven Capital Partners, has several advantages.
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By GlobalDataIt provides investors with much more flexibility: allowing them to choose specific investment opportunities that align with their particular investment goals and appetite for risk, and, further, gives them access to a diversified pool of curated investments, each of which can be considered individually on their own merits. Such a strategy also offers a more nuanced approach to risk management. By spreading investments across multiple deals, investors can reduce the impact of any one or more investment on their portfolio’s overall performance, whilst retaining total autonomy over their investment choices.
With such an approach, investors also have greater clarity and control over their investments. Since each deal is evaluated individually, investors have access to detailed information about the company, its financials, its management, its business model, and its growth prospects. Once again, the effect is to empower investors to consider each opportunity in turn, rather than simply committing their money to a blind pool. Additionally, adopting a deal-by-deal strategy can serve as a valuable complement to an existing portfolio that is already diversified across more mainstream products such as VCTs and listed private equity investment trusts.
All this gives deal-by-deal private equity investing the potential to outperform other strategies. By carefully selecting investment opportunities individually, a discerning investor can focus their capital on companies with promising growth prospects and strong potential for good returns. This targeted approach, combined with active involvement from co-investment specialists in the portfolio companies, using their wealth of experience and sector knowledge, gives the potential for higher returns for investors.
Manager Selection is Key
Given the complexity of identifying suitable private market opportunities, it is imperative that seasoned investors looking to access alternative assets on a deal-by-deal basis collaborate with an experienced market specialist. Investment managers with experience in the larger private equity market can leverage off their proven experience in the sector to compliment the requirements of private investors. Such specialists possess the expertise to pinpoint opportunities that align with a client’s investment strategy and the sector-specific knowledge required to guide each deal to exit.
As investors reassess their portfolios at the start of this year, the trend towards broadening access to private equity is expected to accelerate.
For investors seeking to enhance the resilience and bolster the performance of their portfolios, deal-by-deal private equity investing is poised to become an integral component of their investment strategies.
Victoria McGurran is the director of Private Client Relations at Maven
