Market conditions spur investment in private equity, says TIGER 21 report
TIGER 21, a peer-to-peer learning network for high-net-worth investors, reports that investment in private equity continues its upward trend, increasing by one per cent to 23 per cent in the first quarter of 2016, the highest rate ever recorded for the group.
TIGER 21 now has more than 400 Members who manage in excess of USD40 billion in personal investible assets. Members' traditional "risk equity" allocation is now 70 per cent when private equity is added to public equity and real estate allocations, and an even higher 78 per cent when allocations to hedge funds are added in.
"While some of our Members' hedge fund allocations are 'market neutral' by any standard, the 70 per cent for the three core equity holdings, and the 78 per cent when hedge fund allocations are added in, are at or near historic highs relative to prior levels," says Michael Sonnenfeldt (pictured), Founder and Chairman of TIGER 21.
The broader "risk equity" allocations (including hedge funds) had peaked at 77 per cent in 2007 and fallen to a low of 60 per cent in 2009, but have now marched back to a combined 78 per cent over the intervening period. This equity exposure roughly compares to historic norms for institutions and "balanced portfolios" of equity risk closer to 60 per cent. Within the risk equity allocation, the biggest shift over the last decade has been the growth in private equity from a low of 10 per cent to today's 23 per cent, and perhaps even more noteworthy is that private equity at 23 per cent has topped the public equity allocation of 22 per cent for the first time. Cash allocations remain at 10 percent, an amount which remains lower than historic cash allocations in more stressful times. Fixed income is at 10 per cent and remains at or near the lows recorded over the last decade.
"The high private equity allocation is a reflection of the unique composition of our Members, where the overwhelming majority are first generation creators of significant wealth (usually through amazing entrepreneurial success) and therefore are better equipped to manage risk than many other types of investors. Our Members' unique skill sets and experience, as well as their tolerance for risk, allow them to participate more aggressively in the private equity markets," says Sonnenfeldt. "In the past decade, we have seen Members double their investment allocations to private equity. It isn't surprising that when challenged by a negative real interest rate environment, where you have to take risk of one form or another just to 'keep up,' TIGER 21 Members would rely heavily on what they are most familiar with – private equity and real estate. We are seeing Members apply the same types of insights and strategies which allowed them to build great businesses and significant wealth in the first place."
"This interest rate environment presents a unique set of challenges. Higher allocations to private equity and real estate are not necessarily prescriptions for passive investors, but rather a reflection of how extraordinary business men and women who have already created great wealth by their own efforts, often from scratch, are adjusting (often following a liquidation event when their business was sold) to the current marketplace conditions," says Sonnenfeldt.
The findings of this report reflect the unique attributes related to capacity and willingness to manage and shoulder risk. Each of our Members' participation in one of the 32 TIGER 21 Groups across North America gives them access to a personal "board of directors" they could not duplicate on their own. All of the Members of this personal board of directors are peers and have no agenda other than mutual support – including helping to identify risks and opportunities that might not be obvious or easy to understand. Many Members join TIGER 21 after a liquidity event, such as the sale of their company. Once that event happens, Members must shift their focus to preserving their wealth. Standard approaches all too often rely on an overdependence on publicly traded securities, which have had suboptimal returns over the last decade. That approach often deprives a Member of the unique advantages their own specialised experience and instincts can add.
Sonnenfeldt says: "Preserving wealth in today's environment is harder than ever. When real interest rates are negative and investors are reliant on their portfolio of investments to fund their living expenses, while trying to maintain an inflation adjusted level of capital, shedding all risk is not feasible, and quite frankly, it's not in the nature of many of our Members. In this environment, the only way to maintain real value and not go backwards is to take on risk."