Private Equity Gets a Little More Public

We’ve been working for a very long time to bring you access to a new investment class: private equity. 

Private equity is the ownership of a stake in a private company. (By contrast, stocks are sometimes referred to as public equity.) Private equity funds look for companies that they believe are well-positioned to increase in value, buy them, make improvements to them over a period of time (often five to ten years), and later look to sell them at a higher price.

There is risk involved (more on that below), but the asset class can be a good option for investors with long investment horizons because of the potential for high returns. From 2001 to 2023, private equity returned 10.5% vs. the global stock market’s 5.7%. Given the current economic conditions, going forward we estimate private equity to continue to outperform by about 3%, net of fees. Over a long period of time that extra 3% can improve outcomes considerably.

The risk mentioned above is a big driver of those outsize returns. Underlying companies are riskier than the broader market, and investors are compensated for taking on that risk. Also, private equity managers tend to use more leverage than typical companies, which increases returns and adds more risk. 

There are implementation risks to private equity, too. They include illiquidity (you can’t always sell your holdings quickly), and a lack of index funds, which means you can’t invest in the overall market — and which puts a lot of pressure on finding the right fund manager. 

We’ve done a few things to mitigate the risks in this asset class:

1. We partnered with the Liechtenstein royal family’s wealth management group, LGT. Not only do they have a track record of above-median returns, they’re also a co-investor, which makes them highly incentivized to manage for returns instead of simply gathering assets to collect more in fees. 

2. We intentionally found a fund that invests only in the secondary market at a discount (the market average is currently 17%) or at market prices for new direct investments. This attempts to avoid the problems with many existing open-ended private equity funds, which contain deals that include debt financed at low interest rates (which may be hard to maintain in times of stress) and whose valuations may be high relative to what the underlying assets would face in a sale (because they have not yet been marked down in line with public markets). 

3. LGT uses less leverage than the industry average. It has not been a meaningful contributor to their approach or returns.

For investors who can bear its risk, private equity may be a valuable addition to portfolios as part of a managed investing relationship with Wealthsimple. The Fund’s current annualized long-term return target (10-plus years) is 12% to 14%, net of fees. But it’s not suitable for everyone. We’re making Wealthsimple private equity available to clients with $100,000 or more in deposits, a long enough time horizon to ride out volatility, and enough flexibility to deal with the fund’s relative illiquidity. If that sounds like you, you can apply to add it to your investment portfolio or read more here.

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