Given their ongoing quest to diversify their investments, private equity has been on self-managed super fund (SMSF) members’ radars for some time. Many Self Managed Super Funds started to take notice of this attractive asset class when Australia’s sovereign wealth fund, the Future Fund, was reported to have increased its allocation to private equity to over 16 percent of its assets in early 2021.
In the past, it has been extremely difficult for the vast majority of investors to access private equity due to a number of barriers to entry. As an asset class, private equity, by definition, is an alternative path for companies to raise capital and pursue growth opportunities outside of listing on public markets. Now, there is a way for SMSFs to more easily invest in private equity, eliminating the traditional unavailability of this exciting asset class,
Pengana Capital Group’s Private Equity Trust (trading on the ASX under the ticker ‘PE1’), makes units in a globally diversified portfolio of carefully screened private equity investments available for access through the Australian Securities Exchange. In turn, giving SMSF members a unique vehicle to gain exposure to this important and growing part of the capital markets. The PE1 portfolio of private market investments is managed by Grosvenor Capital Management LP, one of the largest and most diversified independent asset managers in the world, with over US$67 billion in assets under management.
In order to determine whether listed private equity fits into your SMSF’s asset allocation, it is important to fully appreciate private equity’s unique characteristics.
Here, we explore three reasons why private equity is a compelling proposition for SMSF investors.
1. See more than just the tip of the iceberg
Of all companies in US and European markets with annual revenues in excess of US$10 million, only 2 percent are publicly listed, and this cohort is shrinking.
While in 2000, there were approximately 9,000 listed companies in the US, by 2019 this had reduced to a little over 4200. This universe has dwindled as the rules and regulations imposed on listed companies have become increasingly onerous and costly.
Ultimately, investors who are only exposed to listed companies are effectively ignoring 98 percent of the opportunities in the world, which are private companies.
As more and more companies now choose to remain in private hands, they still require capital. “These companies still need to refresh their shareholder base and they need to expand their businesses, which is an enormous opportunity for SMSF investors,” says Pengana CEO Russel Pillemer.
Moreover, listed equities are just one of many asset classes. So, global private equity gives SMSF investors the potential to diversify their holdings not just outside the Australian and global equities markets, but across asset classes.
2. A different asset class to listed equities, with less correlated returns.
Many balanced SMSFs will have considerable exposure to equities, in fact, the latest ATO figures show that, on average, 26 percent of all SMSF assets are equities1. One of the ways to diversify some of the risks of this often-volatile asset class is through exposure to private equity. Historically, private equity has been much more resilient than listed equities during sharp market corrections.
“A good private equity manager loves a good recession,” says Grosvenor Capital managing director Aris Hatch. “Being privately-held, asset values are not subject to market swings, and managers of these investments are not trying to ‘beat the street’ on any given day. During a crisis, they are able to slash costs, drive efficiencies, and inject capital, without worrying about share prices,” she adds.
Hatch explains over the past 20 years, the best private equity funds have been formed during a down market, to take advantage of favourable asset prices. “Putting money to work during a recession means we are able to buy companies at a discount and sell them when markets and multiples heat up.”
It is worth noting, since the market crash in March of 2020, 6 of PE1’s investments have been named in the top 10 of the world’s largest private companies with valuations over US$1bn (Instacart (US), Stripe (US), SpaceX (US), ByteDance (China), Nubank (Brazil), and Rivian (US)) which form part of an over 350-company-strong portfolio of companies.
3. Investment objectives and timelines are in sync with many SMSF investors
An alignment of goals, and timing, is the third reason SMSF investors are increasingly exploring private equity. Many have longer-term investment horizons that match those of private equity returns, and a corresponding intention to generate strong returns with low levels of risk over time.
Pengana’s Private Equity Trust (ASX: PE1) offers an additional level of protection and investor benefits. While the assets in the fund overcome many of the challenges of traditional private equity investments, investors can easily buy and sell units on the listed market (of course, like all listed equities, subject to an active market of willing buyers and sellers), and are afforded the additional protections listed vehicles offer, such as continuous disclosure obligations.
In sum, PE1 delivers investors a high-quality and highly diversified portfolio of global private equity assets in a listed form, managed by one of the world’s largest and most diversified independent asset managers.
In an uncertain world, PE1 is an opportunity few SMSF trustees can ignore.
PE1 provides access to a diversified portfolio of global private market investments via a listed investment trust structure, and seeks to generate attractive returns and capital growth over an investment horizon of at least 10 years.