Time to look past the perceived risks in private equity: Federation

Advisers may be holding back from private equity investment because they have an exaggerated view on the liquidity risks involved, but providers offer more liquidity now than ever, and smart advisers are capitalising on this.

The legacy perception that allocation funds to private capital invites an unviable amount of liquidity risk is outdated, and custodians of capital such as financial advisers would do well to consider the inherent advantages of private equity over the stock market according to Federation Asset Management chief executive Cameron Brownjohn.

Speaking at The Inside Network’s recent Alternatives Symposium at Cape Schanck on the Mornington Peninsula in Victoria, the CEO explained that advisers responsible for protecting and growing their clients’ collective wealth often take a misaligned view that private equity investment comes with inhibitive liquidity restraints. The reality, he explained, is that many PE purveyors have loosened their liquidity parameters and made access to redemptions much easier for investors.

“Is private capital more or less risky than public equity?” he asked the audience of advisers. “The accepted wisdom has been historically that it’s riskier and that you can’t get your money back. Well, that’s no longer true. You can get a modicum of liquidity out of the sector.”

As the majority of financial advisers invest in private equity as part of the alternative sleeve in diversified portfolios, Brownjohn argued, they are clearly aware of the benefits and more than capable of weighing them up against any residual liquidity risk. “All these people are experts at assessing risk,” he said. “And it’s all about determining the input for your risk measure.”

On that input, he made the case that private equity has proved itself to be a burgeoning source of alpha for investors.

“Over the last 10 years the ASX 200 has returned a three and a half per cent aggregated annualised rate of return, plus about four and a half percent of dividends,” Brownjohn explained. “So there have been dividends, but that doesn’t help you grow your book unless dividends are being reinvested.

“Now three and a half percent over 10 years means that if you put a client in for $100,000 onto the ASX/200, it’s now worth $140,000 – and that’s good. 140 is more than 100!”

Had you bought the average private equity fund over that same period, however, Brownjohn countered that a $100,000 investment would be worth $350,000 today. If you’d bought a top quartile private equity fund, he added, it would be worth at least $710,000. “And that’s better than 140 grand,” the CEO said.

“So I would challenge advisers to think about what risk is to them and to their clients. Is it actually a riskier alternative to invest into some of these increasingly liquid – not 100 per cent liquid, but increasingly liquid – private capital strategies?”