Private equity investment trusts, which are traded on a stock market in the same way as listed company shares, can be used to address many of the challenges faced by retail investors looking to allocate to the asset class.New research published by Pantheon finds that incorporating listed private equity in the form of investment trusts into a private wealth asset allocation has historically demonstrated potential to improve returns and risk-adjusted performance for private wealth portfolios.
The authors of the paper, Mind the Allocation Gap, created a hypothetical benchmark alternative assets portfolio comprising equal allocations to gold, hedge funds and real estate, which they then compared to a second portfolio that also included an equal-weighted allocation to listed private equity. Performance was compared over 10 years to capture a full economic cycle that spanned the Global Financial Crisis.
As a proxy for listed private equity the research used Pantheon International, a private equity investment trust listed on the London Stock Exchange (LSE) since 1987 that is diversified across geographies, stages, sectors, vintages and managers.
Results showed that the portfolio including listed private equity outperformed the benchmark portfolio by 0.5x over the full period on a total return basis, or around 2.4 per cent per annum. Importantly, while this additional performance came with additional risk, the listed private equity portfolio also recorded a higher Sharpe Ratio (0.56 vs 0.47) over the period, indicating improved risk-adjusted returns.
“Private wealth investors have historically allocated significantly less capital to private equity than institutional investors,” says Helen Steers, Pantheon Partner and manager of PIP, who co-authored the paper. “That reflects a number of factors, including retail investors’ relative lack of awareness of the asset class, as well as its high investment thresholds, administrative complexity, relative illiquidity compared to traditional equity and bond funds, and difficulty accessing the best private equity managers.”
“What our research shows is that if these hurdles can be overcome then private equity has the potential to bring real benefits to private wealth portfolios – and that listed private equity could be a valuable tool to achieve that.”
