Alternative Investments Outlook: Private Equity in a Bifurcated Landscape

12.15.2020 - Kate Huntington, Head of Advisory Solutions Group

Staying Disciplined Is Key

Private equity has become an increasingly attractive tool for sophisticated investors to enhance the return potential of their portfolios. Its appeal appears to have grown even more given the low yield environment. Yet, private equity comes with several caveats—namely the increased risk from illiquidity and higher management expenses. Plus, it requires a long-term mindset.

Within private equity, the dispersion from top to median performers illustrates the real attraction of the asset class compared to public markets, which often are more efficient. The most compelling risk-adjusted returns relative to public equity have been in the top quartiles of private equity funds where the difference from the median is measured in hundreds and, in some years, thousands of basis points.1

A Long-Term View and Diversified Approach Are Key

Investing in private equity takes time. A manager’s process usually includes obtaining capital, finding suitable investments, creating operational and financial value and finding exit routes to maximize the investment. It’s designed to reward investors who have a long-term horizon embedded in their overall asset allocation plan and take a consistent, disciplined approach. 

This past year has shown that markets can be unpredictable. In any market environment, investing in private markets is difficult to time. A commitment strategy that allows an investor to consistently achieve and maintain a targeted private equity exposure can be just as important as determining the initial allocation. 

The key is maintaining a steady allocation pace across vintages (the year in which a fund is raised) and strategies. This discipline adds diversification within private equity allocations as well as an investor’s broader portfolio. Given that each private equity fund typically runs its course over 10 plus years, making commitments across various strategies attempts to capture multiple return drivers for particular time periods. 

Opportunities Arising from Change

During 2020, many businesses have been forced to cut costs, change business plans, pivot and evolve, requiring operational expertise and cash infusions. However, the pandemic has also brought opportunities. Strong tailwinds exist in healthcare, logistics, e-commerce and all things digital, fueling demand for new solutions and business models. However, the most dislocated sectors (i.e., retail, travel, and energy) face continued uncertainty. 

Private equity was built for creating long-term value resulting from change. The backdrop of rapid adoption, technological acceleration and economic uncertainty may bode well for private market investors. However, the market has only slowed in spots (not paused) and valuation remains key. While private equity deal volume is down, median buyout multiples have been steady in 2020 from record 2019 levels.2 Venture capital has shown even more resilience,3 partially fueled by the robust initial public offering market, which offers private equity investors important exit routes.

With liquidity infusions drying up and a divergence of business outcomes, uncertainty and distress usually reward liquidity providers, operational expertise and other factors unrelated to price. Companies with challenged balance sheets, large corporations needing to shed divisions and founder-owned companies seeking liquidity can create interesting entry points for private equity. Often these are quality companies experiencing one-off events. Finally, we think the need for new business models and solutions in areas like healthcare and technology may continue to support valuations of certain high-growth companies. 



1. Cambridge Associates, as of 6/30/2020.2. Pitchbook Data Inc., as of 10/8/2020.3. Pitchbook Data Inc., as of 10/14/2020.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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