Alternative Investing : Private Equity

Private Equity InvestingThis is the last of a short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash. We have examined the four most common alternative asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.4 of 4 : Private Equity

What is it?

Private equity is the investment in the equity of a company which is not listed on a public stock exchange. Private equity firms such as Blackstone or KKR will generally start a new fund every three to five years. Most funds have a ten year life, typically investing in a portfolio of private companies in the first half of that decade and disinvesting over the course of the last five years. Private equity managers combine leverage with a focussed strategic or operational goal (aided by having a controlling stake in target companies) to create added value. This added value is crystallised into actual return on exit, which is normally achieved either by sale or by IPO. 

What are the Pros?

  • Most data suggest that private equity has consistently outperformed public equity through bull and bear markets, perhaps by as much as 5% over the long run.
  • Long locked-in investment periods deter poor manager and investor entry/exit decisions.
  • Diversification into alternative investment strategies and into an asset class that is (arguably) uncorrelated to public equities.
  • Benefit from the expertise and (legal) inside information of specialised managers in inefficient markets.

What are the Cons?

  • Illiquidity – your funds can be locked away for as long as 10 years.
  • Your commitment is generally called incrementally as the manager invests so you have to maintain a cash-like reserve that is quickly available for capital calls. If factored in to your investment this deflates total IRR considerably.
  • Costs are high (management and performance fees) and opaque.
  • Performance across various funds and managers is highly diverse.

How to invest?

A handful of Dublin private client brokers offer access (to qualifying investors) to the best known American and European private equity managers, either via single funds or funds of funds. This of course adds another layer of charges.

Do you need it?

Given the minimum investment is often €100k, I would advise that only investors with investment and pension portfolios of €1m+ need to consider adding private equity to their portfolios. And if you do invest, allocate no more than 20% of your total portfolio to this asset class and pick a fund of funds structure that offers both manager, strategy and geographic diversification.

 

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.

Alternative Investing : Property

Buy-PropertyContinuing our short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash – in which we take a look at the four most common asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.3 of 4 : Property

What is it?

From my experience as a financial advisor, in Ireland property is far from an investment alternative. In fact for many, everything except cash and property are alternatives! So I think you’ll understand if I skip the ‘what is property?’ bit. What I will say is that today I’m evaluating property as an investment for those who already own their own homes. Just for the record, I believe that owning your own home makes really good financial sense for lots of reasons – which I’ll cover in a future blog. But for now, let’s just talk about non-home property investments.

What are the Pros?

  • Expected long term returns of around 6% – higher than cash and bonds.
  • Portfolio diversification as performance is not correlated to equities.
  • Property is a ‘real asset’ that has an obvious ‘bricks and mortar’ capital value and pays (rental) income.

What are the Cons?

  • Single property risk and hidden fees can be higher than expected.
  • Can be subject to equity-like volatility and severe illiquidity.
  • Diversification benefits cannot be relied on in a financial crisis.

How to invest?

You (or your pension) can of course directly buy an investment property and take advantage of expense income tax relief – but the capital gains tax exemption has now been phased out. Or you can avoid the additional costs, worries, single property risk and leverage risk (if you’re borrowing to invest) of being a landlord by simply buying a property fund which exposes you to a large portfolio of property assets.

Do you need it?

Not necessarily, but for a more balanced portfolio, yes. At Money Smart we stopped recommending direct property investment once the capital gains tax exemption ended. But we do believe that your investment portfolio can benefit from a small exposure to a diversified property fund (or ETF or REIT) which may have both direct and indirect commercial (and perhaps residential) property holdings.

 

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.

Alternative Investing : Commodities

CoffeeContinuing our short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash – in which we take a look at the four most common asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.2 of 4 : Commodities

What are they?

Commodities are the raw materials used to create products, from ‘hard’ commodities such as gold and silver to ‘soft’ commodities such as coffee and sugar. Some investment professionals believe that commodities can lower portfolio risk while still providing an excellent return.

What are the Pros?

  • Higher expected long term returns than cash and bonds.
  • Portfolio diversification as performance is not correlated to equities.
  • Exposure to an asset class with a different performance cycle.

What are the Cons?

  • Commodities do not pay interest or dividends.
  • High volatility – can be more than twice as risky as bonds.
  • Diversification benefits much less evident since 2008.

How to invest?

You can now get cheap and efficient access to commodity funds on most investment platforms. If you are tempted to invest, stick with a whole market index ETF rather than expose yourself to single commodity risk.

Do you need them?

No. At Money Smart we believe that your investment portfolio can be perfectly balanced without the addition of commodities. Your absolute return and equity holdings (assuming you have them) should have sufficient direct and indirect exposure to commodity markets.

 

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.

Alternative Investing : Absolute Return

Absolute Return

This is the first in a short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash. We will take a look at the four most common alternative asset classes in general order of risk/return profile: Absolute Return, Commodities, Property and Private Equity.

No.1 of 4 : Absolute Return

What is it?

Targeted absolute return funds can be considered part of the hedge fund universe in that they manage investments with the goal of generating positive returns regardless of the direction of the general market. This flexible mandate may employ long and short positions, derivatives and leverage. The absolute return sub-set tends to have reasonably conservative performance goals, resulting in risk/return behaviour somewhere between bonds and equities.

What are the Pros?

  • Higher expected returns than cash and bonds.
  • Positive returns through all market cycles (hopefully!).
  • Better diversification and less volatility (risk) than equities.
  • Lag equities in bear markets.

What are the Cons?

  • Capital is not guaranteed – can produce negative returns in bear markets.
  • Complex strategies (using derivatives) and a lack of transparency.
  • Active management risk.
  • Lag equities in bull markets.

How to invest?

As (mostly) regulated onshore products, absolute return funds are the cheapest and easiest to access part of the hedge fund world. All of the major insurance companies have their ‘house’ version and investment platforms now offer a wide range of these funds. Because of the diverse range of funds, strategies, asset classes, geographies and performance, I would recommend you seek independent professional advice.

Do you need it?

At Money Smart we believe that multi-asset absolute return has a valuable part to play in a balanced portfolio. Although it does not have the negative correlation (to equity) benefits of bonds, absolute return can provide better returns than bonds in exchange for marginally more volatility – a key attraction in today’s low interest rate environment.

 

Talk to Money Smart about whether you need an absolute return fund in your portfolio (and which one) by calling 01 276 0006 or emailing info@moneysmart.ie.