In the last few years, there has been a growing trend among institutional investors to diversify their portfolios by investing in alternative asset classes such as private equity. According to Mark Hauser, founder and managing partner of Hauser Private Equity, this shift towards private equity has resulted in market allocations ranging from 10 percent to 25 percent for large institutions like pension funds, endowments, and foundations. This diversification strategy is driven by the desire to achieve better risk-adjusted returns and to mitigate the impact of market volatility.
While private equity has some accessibility challenges, such as the requirement for investors to put forward a significant amount of capital for an extended period of time, the asset class’s growing popularity is expected to improve its reachability. As more investors recognize the potential for private equity to deliver attractive returns over the long-term, the market is likely to evolve, making it more accessible for a broader range of investors.
Hauser points out that the rise of private market asset classes like private equity is closely linked to the declining number of exchange-listed stocks. As more companies are able to raise money in the private markets, it has become easier for them to remain private for longer periods of time. This trend is expected to continue as companies seek to avoid the regulatory burdens and disclosure requirements associated with going public. As a result, investors are increasingly turning to alternative assets such as private equity to gain exposure to high-growth companies that are not yet listed on public markets.
One of the benefits of allocating portfolio space to private equity is that investors can hold a broader and more varied section of the investment landscape. Private equity investments can provide access to companies with strong potential for performance that have either chosen to remain private or are not yet ready to enter public markets. Investing in such companies can spread risk at a lower level, prevent concentration in a single asset class, and improve a portfolio’s overall diversification.
However, investing in private equity comes with a degree of risk, and requires careful planning and due diligence. Mark Hauser notes that before allocating any funds to private equity, investors must assess how it would affect the overall performance and volatility of their portfolio. It is important to ensure that the investment aligns with their investment objectives, risk tolerance, and time horizon.
When adding a new asset class such as private equity to a portfolio, it can be helpful to do research and take inspiration from experienced investors on how much to allocate. While the ideal allocation may vary depending on factors such as the investor’s risk tolerance, investment objectives, and overall portfolio composition, benchmarking where others have landed can provide a useful starting point. Hauser says it is important to remember that no two portfolios should ever be alike and that careful consideration must be given to each individual investment decision.