Page 45 - Investment Advisor October 2022

ALTERNATIVE INVESTMENTS

By Josh Vail

How to Engage With Clients Now on

Private Equity

Here are two key talking points about these investments and their

performance that should be discussed.

he understanding of the private managers is one of the largest observed
equity landscape and the ability spreads between top and bottom quar-
Tto educate clients on the alter- tile in any asset class.
native assets class, including the myriad Looking at the period from 2011-
of options available to them is a para- 2020, private equity manager return
mount skill for advisors going forward. spreads from the overall median return
After a historically strong, multi- to the average bottom quartile perform
year period for stock and bond market were over 20%! This means that advi-
returns, measured on a both absolute and sors must avoid picking a bottom tier
risk adjusted basis, 2022 ushered in infla- manager which could negate any poten-
tion and subsequent interest rate hikes, tial benefit of private equity.
essentially ending the proverbial “party.” Further, established top tier private
Now, many investors are exploring equity funds are typically difficult to get
other options to hit long term return market equivalent benchmarks by into. Without the proper advisor sup-
goals. Investor demand is not the only between 400-500 basis points per year, port and choice, investors may “bet” on
force behind the need for advisors to but it has also demonstrated greater an emerging manager who hasn’t found
bone up on private markets. There is also outperformance in years in which the institutional backing.
a collective push into the private wealth public markets struggle. With the right education and advisor
space from leading private equity general When public markets are flat to down, guidance, retail investors can partner
partners, which, in turn, is likely to con- private markets have seen some of their with a firm that allows them to invest in
tribute additional pull from investors. best relative outperformance, outpacing a fund alongside institutional investors.
This phenomena exists because indi- public markets by 600–800 basis points. Thankfully, with increased demand for
vidual investors are vastly underweight There are several reasons for this. retail private equity investments, there
to private equity relative to their institu- Some of the outperformance may come are now more opportunities for individ-
tional counterparts and that fact has led from the so-called “smoothing effect” ual investors to partner with established
to increased interest in the individual where the underlying assets don’t go private equity general partners.
investors from capital raisers. through the violent daily moves and
Advisors who ignore the inevitable have fewer “point in time” observations. A NEW CONVERSATION
growing swell and don’t find a way to That, however, is not the whole story. With performance driving a grow-
ride the surf, risk being caught in very Through the downturn of 2022 it’s ing level of interest in private equity
deep water far from shore. At the heart clear that multiples have compressed. from the individual investor and — in
of good conversations between advi- However, private equity proponents turn — a rise in general partners’ interest
sors and their clients are strong talking point out factors such as long-term in individual investors, understanding
points, from multiple angles, about per- investor alignment and an increased the nuances of the performance obser-
formance and the vehicles that have a opportunity set, can lead to investments vations tied to private equity will be a
chance to register strong performance. in companies that are more likely to critical success factor for advisors when
financially outperform during times that engaging with their investor clients in
KEY OBSERVATIONS public equity markets struggle. this investment area.
Adobe Stock outperforms public markets. In fact, not vate equity are by no means equal. The Josh Vail, CAIA, is managing director of
Number two: Investments in pri-
Number one: Private equity, on average,
return dispersion among private equity
only has PE historically outperformed
Hamilton Lane.

OCTOBER 2022 INVESTMENT ADVISOR 43