While some investors may be looking warily at the aging bull market, the private equity category seems likely to continue growing in popularity through 2017.
In fact, this niche asset class is increasingly looking mainstream. Private equity grew in size from $30 billion in assets in 1995 to $4 trillion today—a growth rate of almost 28 percent a year, according to the 2016 SEI Private Equity Survey. In contrast, long-term mutual funds in the United States grew in size only 10 percent annually over the same period.
The median of those surveyed predicted that private equity will grow to $7 trillion 10 years from now, the survey says, concluding that, “With such growth prospects, even skeptics may want to acknowledge the fact that private equity is well on its way to becoming a mainstream asset class.”
Private Equity In IRAs
One way in which financial advisors are able to help their clients invest in private equity is with a self-directed IRA. The power of a self-directed IRA comes from its broad access to investment options like private equity, real estate, precious metals or other alternatives to traditional investment choices.
For financial advisors and investors who do their homework and still like the idea of investing alongside some of the nation’s leading institutional investors, private equity may offer six constructive ways to play a role in a retirement plan strategy.
1. Tax-Advantaged
Through a self-directed IRA program, investors can gain access to the potential benefits of private equity on a tax-advantaged basis. It’s important for investors, as well as their advisors, to undertake their own review and analysis of private equity choices.
2. Long-Term Return Potential
While no investment is without risk, according to the 2017 Preqin Global Private Equity & Venture Capital Report, “95 percent of investors (in a recent survey) believe that their private equity portfolios have met or exceeded performance expectations over the past 12 months” for the year ending June 30, 2016.
“2016 was another stellar year for private equity,” the Report continued. “The asset class will continue to appeal to investors looking for high absolute returns and portfolio diversification.”
Preqin provides research on alternative asset trends to some 47,000 professionals located in over 90 countries, according to the Report.
3. Diversification
Private equity may provide the kind of portfolio diversification for individual investors, which is favored by many of the major pension funds. Self-directed IRAs invested in private equity or other alternatives may provide a way for investors to diversify a portfolio beyond traditional equity, bond and mutual fund choices.
As John C. Bogle, founder of the Vanguard Group, famously said, “Diversification is not only the first important thing investors should think about, but the second and the third, and probably the fourth and fifth, too.”
4. Accessible
Traditionally, only accredited investors have been allowed to invest in private equity, as noted above.
Due to the imminent retirement of millions of baby boomers, many investors with lengthy tenures and substantial deferred-compensation may have already reached the $1 million threshold for accreditation and may now be eligible for participation in the private equity market. However, investing in private companies is no longer just for millionaires. While many traditional private equity opportunities are open only to accredited investors, there are a growing number of opportunities for non-accredited investors, too.
With approval in 2016 of new rules for equity crowdfunding, even average investors can invest in some private equity investments with smaller asset amounts. They can also invest in closed-end funds, such as those created through publicly traded private equity stocks known as business development companies (BDCs).
5. Investor’s Knowledge
Many retirement-minded individuals have a professional lifetime of experience in those very industries that create growth opportunities in private equity. Former employees of companies in technology, consumer goods, financial services, materials and other sectors can apply their own industry insights—with help from their advisors—in vetting potential opportunities.
6. Greater Transparency
For those investors who like to validate their assumptions with advisors and experts, a wide variety of online private equity platforms are available to provide information about this investment category. Additionally, a number of research companies offer comparison and screening tools for investment providers as well as private equity firms.
While investors should always proceed with caution where their money is concerned, it is also important to consider the qualifications of their custodian to ensure its board of directors, officers and employees all work within a well-established system of internal controls and administrative oversight.
Jeffrey Kelley, senior vice president, Equity Institutional, has 20 years of experience in financial services operations management and has seen many of the administrative and custodial challenges of private equity at close hand.