Thanks to continued product innovation, there are now numerous structures for investors to consider when investing in private equity but determining the best structure should be a secondary consideration.
Speaking on a recent webinar hosted by Private Equity Wire – Cracking the next generation of liquid alternatives - Private Equity – were three managers which represent a variety of ways for investors to gain exposure to the private equity markets.
Eric Bundonis, Portfolio Manager of a registered interval fund at Artivest, said that in principal investors should be structure-agnostic. Of greater importance, he said, was for them to focus on their time horizon, their liquidity needs, and what they are looking to achieve from a return perspective.
“Once they’ve done this, then they can determine which fund structure might work best for them,” said Bundonis. “As a continuously offered closed-ended fund, we want to make sure our investors have a defined investment horizon that matches those of the underlying private equity funds. We don’t hear investors looking for specific structures; it’s more that they are looking for the right risk/return profile.”
Artivest, a USD3billion alternative asset manager based in New York and San Diego, combines asset management with a financial technology platform, enabling a wider range of mass affluent investors to access alternatives in a paperless format.
The registered interval fund, was brought over by Altegris when the California-based investment firm entered into partnership with Artivest last year.
Platforms like this are helping open up private equity to accredited investors, having previously been the preserve of qualified investors accessing traditional LP structures. Now, registered funds, be they closed-ended interval funds offering limited liquidity or open-ended structures offering daily liquidity, are proliferating at a time when private equity is enjoying unparalleled growth.
Over the last 12 months the levels of dry powder in private equity markets have reached record highs. USD453 billion raised and more than 900 funds. This is a propitious time for investors, who may be new to the asset class and thinking about how best to invest in the asset class.
Orthogon Partners is a New York-based emerging manager specialising in esoteric assets that manages just over USD300 million in AUM. In the opinion of Dominique Severino, Partner at Orthogon, money managers have come to realise the need to compete to attract capital.
“As such, there’s generally more of a willingness to customise aspects of products offered by managers to meet investor demands.”
“Orthogon Partners operates traditional GP/LP closed-ended structures with committed capital. Commitments are drawn on as investment opportunities arise. Our typical fund has a seven-year life, generally three years of investing and four years of harvesting. This means investors’ capital could be locked up for seven years, though they often receive proceeds from realisations throughout the life of the fund. The key differentiator for investors is our expertise in pursuing esoterics, which are generally difficult to purchase, less competed, unconventional assets. The strategy is organically diversified in asset class, sector, and geography.”
“My advice to investors would be to use competition among managers to their advantage and build a portfolio that really works for them. There are opportunities out there for every type of investor.”
What makes the industry so dynamic right now is that registered ’40 Act fund structures are helping to democratise the private equity investment universe. This is important when one considers that the US private market is five times bigger than its public market: there are an estimated 20,000 privately-owned companies, compared to 4,000 listed companies.
Traditional LP structures used by Orthogon Partners and the vast majority of PE managers are the primary choice for experienced institutional investors. Now though, registered fund structures are opening up private equity to a much wider range of investors – giving them multiple access points to invest in private companies and generate new sources of returns.
David Armstrong is Portfolio Manager at Good Harbor Financial LLC, which offers several Alternative mutual funds. Open-ended 40-Act structures such as those operated by Good Harbor offer daily liquidity, whereas continuously offered closed-ended structures like the Altegris KKR Commitments Fund offer up to 5 per cent quarterly liquidity.
“What we offer investors is the ability gain broad exposure to the PE Buyout and Venture Capital markets, and the associated risk/return characteristics,” commented Armstrong. “According to a recent Financial Times article, they observed an anomaly in that market valuations are currently at record levels and yet the number of listed companies is only half what it was back in 1996.” (FT, At a record high, the US market is still shrinking; Stock exchanges should not become the preserve of mature businesses, Aug 24, 2018)
“The focus of our mutual funds is to track Thomson Reuters indexes designed and managed to value the venture capital and private equity markets. There are currently around 8,000 companies represented in the Thomson Reuters Venture Capital Index (ticker TRVCI) with USD1 trillion in market capitalisation, and roughly 3,500 companies representing USD3 trillion in market capitalisation in the Thomson Reuters Private Equity Buyout Index (ticker TRPEI).”
Good Harbor Financial is the investment adviser to the LelandFundsTM
As interest in the asset class continues to expand, service providers like Gemini Services are continuing to work with more and more clients and develop new solutions.
“Gemini services private equity from the registered open-ended side of the spectrum all the way across to our dedicated managed account platform,” remarked David Young, President of Gemini. “We have seen significant interest from large asset allocators and owners wishing to have their own customised portfolio and their own systems and controls in place. Each structure has its own particular nuances which Gemini caters for.”
Bundonis said that most of Artivest’s investors are mass affluent, who are likely gaining exposure to private markets for the first time.
“We want to put their dollars in safe hands with an operator (KKR) they will be familiar with and that they trust,” he said. “It’s an approach that we think is optimal for investors who are accessing the private equity space for the first time and want dependable returns that fall in line with their expectations.”
There was a consensus on the panel that registered private equity funds can best be thought of as a return enhancer for investors’ portfolios, and that such funds are complimentary to public equity investments.
“We focus on the fund acting as a return enhancer on their public equities portfolio. We advise allocating anywhere from 10 to 30 per cent of their public equities portfolio into private equity.
“In our opinion, a couple of hundred basis points over MSCI World over a market cycle is realistic from a performance perspective with lower volatility. In our fund, volatility is less than half of that in public markets,” confirmed Bundonis.
Young believes that continued flexibility and ability to have many different access points into private equity will continue, and help investors address their individual liquidity needs; which is not something one could have said a decade ago.
“Investors now have that flexibility, and more control, contingent upon the size of their investment. There are a couple of examples of how they might do this.
“First, the client might choose to set up a feeder fund to aggregate investors to go into an existing fund, which echoes Dominique’s earlier point regarding competition among private equity managers. Secondly, some managers are more willing to negotiate with investors and create bespoke strategies and investment portfolios for investors of a significant size; more so endowments and large institutions with hundreds of millions of dollars than HNW individuals,” said Young.
In conclusion, Severino offered a word of caution: “As much as managers want to attract capital and grow, at the end of the day they need to be profitable. Customisation can be expensive, and managers have to be wary of devoting resources away from their assets and towards increased operational burden. There should be a balance of flexibility and scalability in mind.”
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