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July 06, 2010 |
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Private Banks See Opportunity In Private Equity |
(Dow Jones) With optimism slowly returning to the private equity business, some private banks see opportunity.
The credit crisis of 2008 hit private equity hard, making it
difficult to borrow for new leveraged deals or cash out of old ones
through moves like an initial public offering. Lately, improved credit
and equity markets have solved some of those problems, but many
traditional private equity investors, such as endowments and pension
funds, remain wary of boosting their holdings. That's provided an
opening for wealthy individuals, say private banks.
"We're increasing our allocation to private equity," says
Guy Dietrich, the head of UBS AG's New York private wealth
management office. "It's a tactical decision."
Among the areas he sees attractive deals: distressed debt,
distressed real estate, and the secondary market, where new investors
can take over others' stakes in existing private equity funds,
sometimes shortening the deals' long commitment periods.
There's a historical case for private equity, which fared well in the years following the last recession.
"One of the best times to buy private equity was 2002 or 2003;
valuations were attractive," says David Frame, head of alternative
investments at JPMorgan Chase & Co.'s private bank. "It's
hard to know if that's the kind of market we're in now, but private
equity firms are optimistic."
One type of holding JPMorgan favors: funds that make loans
to small and mid-size companies that are having trouble borrowing from
traditional lenders like regional banks. The debt-oriented funds
closely resemble private equity holdings, promising slightly lower
returns, but also involving less risk, according to Frame.
Usually advisors that work with individual investors focus
on building clients' wealth during their careers, so savings can be
spent down during retirement. But the super-wealthy, those with tens or
hundreds of millions to invest, don't have to worry about gaining
access to the bulk of their fortunes in old age and can invest more
like institutions, tying up money in private equity funds that often
require commitments of a decade or more.
Private equity usually fits into investment portfolios
alongside other "alternative" investments like hedge funds and real
estate, helping investors avoid relying exclusively on stocks and
bonds.
"Private equity has a very attractive risk-reward profile,
but a very unattractive liquidity profile," says Ron Florance, director
of investment strategy for Wells Fargo & Co.'s private bank.
The firm typically recommends some private equity exposure to its
wealthiest individual clients, although it usually doesn't make it more
than 5% of their investment portfolios.
It also uses a number of tactics to make sure clients are
diversified not just among a number of different private equity
investing strategies but among funds with different start dates, or
"vintages." The result is a series of staggered investments, not unlike
a bond ladder. Other times, Wells Fargo uses private equity fund of
funds which can accomplish the same goal. Florance says the firm works
hard to make sure investors understand the terms.
"You can't change your mind for 10 years," he says. "That's a big commitment."
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