Private equity (PE) is currently considered a very attractive investment opportunity. Last year, there were a total of 2,296 funds in the market, while this year’s third quarter saw that number rise to 3,951. That’s a 72% increase in the number of P.E. funds.
But what makes it that way, and why now? First, we need to talk about public market assets, including liquid ones, their currently apparent volatility, and how that’s contributing to the large move from public to private.
Private Versus Public
According to the Financial Times, private investment beats out public. In a study that looked at data from institutional investors from 1998 through 2018, when compared to stocks and bonds, private investment offered greater returns.
According to Preqin Ltd., a PE data resource, PE assets grew 26% in 2018, from $2.892 trillion in 2017 to $3.58 trillion last year.
The Benefits of Going Private
Mainstream public markets are expected to reduce returns over the next decade. AQR, a quantitative investment group, estimates a return of as little as 2.9% on average per year after inflation, compared with a 5% average since 1900.
As of now in private equity, the more invested, the more returned: Investors that put 15% or more of their exposure towards private investments over those two decades had a median annualized return of 8.1%. Compare that to those who only contributed 5%, which had a median annualized return of 6.5%.
Foreign Direct Investment and Private Equity
During the summer, GIC, Singapore’s government’s foreign investment wing and one of the largest institutional investors in the world, increased its exposure to private equity and reduced their developed market equities by 4% as of March. 12% of their over $100 billion fund is now in private equity. GIC’s chief executive, Lim Chow Kiat, said the move shows their caution in response to movements in the global economy and their perception that central banks will have a harder time reacting to ripples in the market.
Uncertainty in the Market
The economy is showing signs of an oncoming recession. And though nobody can predict exactly when we will see the effects hit the…
