Insights
By: Meiping Yap
Why are wealthy families allocating more of their portfolio to private equity?
Two minutes with Meiping Yap
The average family office is now targeting to allocate 20%1 of their portfolio to private equity. One of the clear attractions has been its strong and consistent outperformance with wealthy families being perfect investors for private equity given their long-term time horizons. This is often referred to as the ‘illiquidity premium’, where investors receive an additional return over public equity markets for tying up capital in the asset class. Over the past two decades, McKinsey has quoted this illiquidity premium to be 3.5%2 above that of the S&P 500.
Mid-sized businesses offer multiple growth levers to private equity active ownership. They have greater potential to scale up faster and are often under-managed, making them most appealing to private equity managers. The mid-market also offers a far deeper and highly diversified pool of opportunities, with the US having more than 165,000 businesses with revenues below $500m compared to 8,000 at the upper end of the market3. This, coupled with comparatively less capital being raised in mid-market funds, makes this particular market segment most attractive for private equity investment.
There have been many positive developments in the private equity space. A key trend over the past decade has been private equity managers building out their platform with strong operating teams, comprising of highly experienced industry experts. These operating partners have become well integrated into the investment process from entry, value creation to exit. Many of these operating partners become an extension of the management team, tasked with executing on strategic growth drivers, accretive acquisitions and operational enhancements such as digitalisation.
Technology has become increasingly embedded into all segments of the economy. We view technology to be one of the most exciting market segments in private equity. Most notably, the pace of innovation continues to accelerate, with all businesses having needed some form of digital transformation through the COVID-19 crisis. This sector will continue to be a core feature of our programme with exposures across a broad spectrum of fast growing private technology businesses such as software, artificial intelligence, data analytics, cybersecurity, robotics and fintech.
Meiping is a Director within the Private Capital Investment team and is responsible for selecting private capital fund investments and managing existing manager relationships. Hear more from Meiping.
(1) UBS Global Family Office Report 2021.
(2) McKinsey Global Private Markets Review 2021.
(3) 2019 SOI Tax Statistics IRS.
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