Private equities are a growing and increasingly significant part of the investing landscape. For many retail investors already navigating a complicated public equities landscape for clients, that can offer real promise. But it can also prompt plenty of questions. Each individual investor’s needs can vary. But understanding the pros and cons of big allocations in public versus private equities can equip advisors to better serve their needs. That's especially so ahead of a big shift in private.
Why look to private equities in the first place? They can serve as an important differentiator especially for clients with significant assets to allocate. The dominance of big megacap tech firms in the S&P 500 and the intriguing but limited pool of upside opportunities outside of that space speak to the need for some other options that can really stand out.
That’s where private equities come in. They were historically less available in retail-friendly fund wrappers. But now investors have myriad options in closed-end funds and ETFs. Such funds package traditionally complex and sometimes risk-heavy strategies in more accessible tools for investors.
What’s more, private equity investments themselves can lock up liquidity for sometimes quite significant periods of time. So certain strategies can avoid that phenomenon. ETFs, for example, can provide exposure to private equity firms and still offer liquidity. That's thanks to ETFs’ trademark creation/redemption mechanism. Of course, investors can also use closed-end funds to achieve those exposures, potentially with greater direct exposure to private equity investing itself.
So, what are the trends in private equities that advisors need to know? The space appears in the midst of a notable transition. Much higher interest rates have shifted outlooks for numerous general and limited partners.
It’s important for financial advisors to understand the step-by-step process that takes place in private equities. It's also important for them to understand why those higher interest rates may be playing such an important role. According to S&P Global’s Private Markets life cycle, those five steps include fundraising, capital deployment, portfolio monitoring, portfolio administration, and value realization, otherwise known as exiting.
