Why Investing in Private Equity in Late 2023 Makes Sense

Private Equity, Venture Capital
  • Brian Hult

October 10, 2023

Investing in private equity gets you access to a combination of high-growth companies that are not yet publicly traded, and steady stalwart companies that continue to deliver dividends year-over-year.

You may be among the group who have made a shift in your portfolio to hold cash as seen as a growing mountain since 2018 below in the latest presentation from The Capital Group. These $5.6 Trillion reserves grew from a previous holding level of around $2.5 Trillion back in 2017. This trend was last seen in the GFC back in 2007-2010 timeframe, with many deploying capital into markets shortly after the cash peak.

The shift to other forms of assets is driven largely by declining yields of cash. This has been seen before in previous Fed rate hike cycles. Looking closely at the 3-month T-bill yield, you’ll see Cash yields will tend to drop over the outgoing 4-18 months after the Fed’s final rate hike.

Private equity has long been admired for its resilience, even during challenging economic times. While other investment classes may experience volatility, private equity often remains steady. This stability can be attributed to the nature of private equity investments, which generally involve a longer-term commitment to a company or project. The investment period is a key consideration when assessing your portfolio goals and planning.

If you haven’t learned yet, diversifying your investment portfolio is a fundamental strategy for reducing risk. Private equity offers an excellent opportunity to diversify from other asset classes, as it often involves investments in various industries and sectors. This diversification can act as a shield against market downturns, helping to protect your overall wealth.

Investing in private equity gets you access to a combination of high-growth companies that are not yet publicly traded, and steady stalwart companies that continue to deliver dividends year-over-year. The growth companies often have substantial potential, which can result in significant returns on investment, meanwhile the steady stalwarts will provide the solid long-term base protecting your wealth. By investing in such enterprises, you position yourself to benefit from their future successes.

Unlike many other investment vehicles, private equity investments often grant investors the opportunity to have a more active role in the companies they support. This level of involvement can provide a sense of control or insight and satisfaction that may be lacking in more passive investment strategies.

For investors seeking to diversify their portfolios, private equity is an attractive option. It offers exposure to different sectors and industries, reducing the correlation between your investments and minimizing risk. As the tail end of 2023 approaches, spreading your investments across various asset classes becomes increasingly crucial.

Tiger 21 Founder and Chairman Michael Sonnenfeldt was recently interviewed by Elliot Smith of CNBC. He stated “Private equity is now king – that’s where businesses are still scaling.” Their group collectively manages around $150 Billion in assets and over the past decade have increased their allocation to private equity threefold. Unlike the stark $5.6 Trillion in cash holdings seen in the Capital Group data, Tiger 21 members hold only 12% in cash, and have largely trimmed down their public equities and real estate holdings due to rising interest rates.

Investing in private equity is, by nature, a long-term endeavor. It requires patience and commitment. However, this approach can be highly rewarding. Private equity investments have the potential to generate substantial wealth over time, making them an excellent choice for those with a long-term financial plan.

There certainly are risks present broadly in private equity. Many private equity firms rely on a balance of equity and debt for financing buyouts, growth, and other asset deals. Bloomberg reports on firms piling on debt to complete leveraged buyouts, and acquisition of other deals. With the rising rates, these deals will thin the returns to investors depending on the funds strategy. Be sure to do your homework on the fund and look at their use of leverage.

As the year 2023 draws to a close, it’s prudent to consider the potential benefits of allocating a portion of your investment portfolio to private equity. With its resilience, diversification opportunities, access to both high-growth and steady stalwart companies, and the potential for long-term wealth building, private equity offers a compelling proposition for investors seeking to secure their financial future.

 

Are you an investor? 

If you are an accredited investor and looking to place capital in the lower middle market, but don’t want the management headache of the day-to-day operations oversight. Book a call with us.

 

Are you a business owner?

Do you own a business and need to discuss your current situation? Or considering how to exit for retirement over the coming years? Book a call with us.