(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.