Financial advisor Jeff Nauta may invest some of his high-net-worth clients’ money in the Central Park Group’s Carlyle Private Equity Fund, a closed-end interval fund that invests in private equity.
But he won’t be parking more than 5 percent to 10 percent in the fund.
“The upside is the opportunity for higher returns and the potential for diversification within the portfolio,” said Nauta, who manages $150 million with Henrickson Nauta Wealth Advisors in Belmont, Mich. “The downside is potential illiquidity, depending on the fund.”
Central Park Advisers filed an application for the CPG Carlyle Private Equity Fund last year. The fund will be the first to allow entrée directly into its buyouts, which have the potential to be more lucrative than stocks and bonds, according to the Wall Street Journal. The paper adds that some private-equity firms are coming up with “down market” offerings and want to be able to offer their funds through 401(k) plans, as they see future money from defined benefit plans as uncertain.
“The value add of the CPG fund is the potential for liquidity,” Nauta said.
He noted his firm is not investing in private equity for diversification. “We are investing in it as a return enhancer. As long as we beat public equity by 3 percent to 5 percent, that’s what we are shooting for. We expect 3 percent above public equity.”
Private equity managers have an estimated $3.2 trillion in assets under management globally, says Preqin, which provides data and research on private equity.
“Private equity has been largely out of reach for retail investors who typically do not meet accredited investor rules and do not have several million to invest,” said Nadia Papagiannis, director of alternative fund research at Morningstar.
Although the CPG Carlyle private equity fund is not yet launched, it is a ‘40 Act registered fund with a minimum investment of $50,000 and its liquidity is limited to a 5 percent quarterly tender. Investors must have accredited investor status.
“The fund will manage liquidity through its commitment strategy by holding cash that has been committed to underlying private equity funds but have not yet been deployed,” said Papagiannis.
Until relatively recently, the private-equity mutual fund category had been populated by merely one fund called the ALPS/Red Rocks Listed Private Equity Fund (LPEFX), launched in 2007 and requiring a minimum investment of $2,500.
“The Red Rocks private-equity strategy may be a good fit for investors with longer-term investment horizons. Although the fund is liquid and priced daily, there is potentially more volatility compared to other asset classes because the underlying private investments made by the private-equity manager are illiquid,” said Mark Sunderhuse, Red Rocks Capital portfolio manager.
The ALPS/Red Rocks Listed Private Equity Fund currently has $237 million in assets and as of April 23, had returned 30 percent in the last year, 10.2 percent annualized in the last three years and -3.3 percent annualized in the last five years, according to Morningstar.
The fund only invests in publicly traded private-equity firms that are listed on various global exchanges, so the fund has daily liquidity with daily pricing,” Sunderhuse told FA magazine.
In exchange for illiquidity for seven to 10 years, traditional private equity funds claim to offer a higher rate of return than the listed stock market but there are risks and fees. The ALPS/Red Rock fund charges a 5.5 percent load and 1.5 percent expense ratio. Carlyle private equity fund costs will include management fees of 1.00 percent to 1.75 percent, an incentive fee of 20 percent, a second-layer management fee of 1.20 percent with a cap of 0.75 percent for the first year, a sales load of up to 3.50 percent and a redemption fee of 2.00 percent for the first year, according to Morningstar.