Private equity has become an increasingly viable option for many individual investors seeking to diversify their portfolios and mitigate volatility. Here are a few reasons to consider PE as part of a strategic allocation to alternatives.
1 Access to a wide field of opportunities not offered in public markets
For every Amazon or Apple traded on public stock exchanges, there are a thousand privately held businesses seeking investor capital to grow. Roughly seven million private incorporated businesses currently operate in the United States, a third of which employ at least 50 workers. These companies represent every major industry, from technology to manufacturing to retail, and include some of the fastest growing and most disruptive startups.
2 Strong long-term return potential
Private equity has historically outperformed broad public stock indexes. Over the past 20 years, the PE funds in the Cambridge Private Equity Index returned over 15% annually, beating US public indexes by more than 500 basis points, using modified public returns (mPME3 ). (The modified return calculation provides a better comparison to private equity performance, replicating public market conditions according to the private fund cash flow schedule.)
3 Historical resilience during market downturns
In addition to delivering strong overall returns over time, private equity has historically outperformed during drawdowns in public equity markets, including the most severe downturns such as the dotcom collapse and the 2008–09 financial crisis. Because private equity is insulated from the daily price swings of public markets, investors often look to PE as a way to mitigate volatility and potentially improve a portfolio’s risk-adjusted returns.
Where does PE fit in a portfolio?
Private equity is considered an “alternative investment” used by many investors to diversify traditional stock and bond portfolio allocations.
Private equity provides access to a broad range of investment strategies and may exhibit diversifying correlations to traditional stock and bond investments. As a complement to public equity investments or other alternative asset classes, private equity has the potential to reduce risk while maintaining or enhancing returns. As a result, we believe private equity can provide more consistency for investors with long-term financial goals such as retirement and long-term care.
