Private Equity: From Exclusive Club to Broad Asset Class

Why Should Private Equity Be Included in a Portfolio?

1. Significant Share in the Market Portfolio 

Private equity has now become an important component of the global market portfolio. According to Preqin, approximately USD 9.3 trillion is invested in private equity as of March 2024, accounting for 4.2% of the total market portfolio. This share has doubled over the past decade. In the USA, private equity is already well established and is frequently utilised by institutions such as endowments and pension funds. In Europe, however, there is significantly more untapped potential, as investors tend to act more cautiously and prefer traditional asset classes. Nevertheless, interest in private equity is increasing among large institutional investors seeking alternative sources of returns.

2. Large Universe 

While publicly listed stocks still dominate the market portfolio, the universe of investable companies in the private sector is significantly larger. Globally, there are about 21,000 publicly listed companies with annual revenues exceeding USD 100 million, compared to approximately 200,0001 (Cap IQ as of May 2023) private companies in this category. This offers private equity investors a much broader range of investment opportunities and allows them to include a large portion of economic value creation in their investments.

3. Active Influence and Long-Term Orientation

Private equity managers can actively influence the strategy and operations of the companies they invest in. In contrast, the influence of public investors is often limited, as they frequently hold only minority stakes and passive funds dominate. Private equity managers, on the other hand, work closely with management teams to achieve long-term, sustainable business results and increase company value. The principal-agent principle is central: private equity managers (principals) oversee and steer management teams (agents) to ensure that their actions are in the best interest of the company's development and the investors. Incentive structures and control mechanisms help minimise conflicts of interest and align the goals of both parties. Most managers are based in the USA, but there are also teams in Switzerland.  

4. Historically Strong Returns 

The performance of private equity has historically outperformed public markets. The Preqin Private Equity Index has achieved an annual return over the past 15 years that is approximately 5% higher than that of the MSCI World Index. This outperformance is due to the active role of investors, their long-term orientation, and their ability to create value. Another important factor is the liquidity premium. Since investments in private equity are generally less liquid than public stocks, investors demand an additional return to compensate for the increased liquidity risk. 

However, these figures should be viewed with caution, as private equity does not always outperform in all market regimes. The outperformance is particularly evident during times when stock indices are experiencing losses, while private equity may not always keep up during booming stock markets. This can lead to better diversification in a multi-asset context.

Graphic 1: Performance of Private Equity vs. Global Stocks 

Why Now?

1. Declining Number of Publicly Listed Companies 

The number of publicly listed companies is declining, and many good companies remain private. In 1990, 85% of new IPO companies recorded positive profits, while in 2020, it was only 21%². This shows that many high-quality companies are turning their backs on public markets and choosing private equity as their preferred source of financing. One reason for this is the higher regulatory requirements imposed by the Sarbanes-Oxley Act of 2002.

2. Moderate Returns in Traditional Capital Markets

The current high valuations in public markets lead to lower expected capital market returns. This is also one of our main theses in our Market Outlook 2025. In this environment, private equity offers an attractive alternative, as it is less dependent on the fluctuations of public markets and tends to perform better when the returns of publicly listed stocks are subdued.

3. Attractive Valuations and Growth Opportunities 

The valuations of buyout transactions are in the 47th percentile² of their valuation range over the past 20 years, while large publicly listed stocks are trading in the 96th percentile³. This makes private equity investments relatively attractive at present. Additionally, there are numerous opportunities to privatise publicly listed companies and carve out business units from larger corporations, offering additional growth opportunities. There is also potential in other riskier areas such as venture or growth, albeit with different risk/return profiles.

4. Democratisation of Private Equity

The democratisation of private equity increases the attractiveness of this asset class. Regulatory changes and innovative investment products are making private equity increasingly accessible to retail investors. Semi-liquid solutions and improved accessibility enable a broader range of investors with a medium-term investment horizon to benefit from the advantages – despite limited tradability.

What Are We Doing in Multi-Asset?

We have been investing in private equity for some time and will now deploy this asset class more broadly. Thanks to attractive market conditions, a broader range of semi-liquid products (Evergreens), and improved accessibility, private equity can now be more easily integrated into a multi-asset mandate. This allows us to capitalise on the long-term growth and return opportunities that private equity offers. Due diligence in selecting the provider is associated with significant challenges and is considerably more complex than with funds with traditional assets. Important factors include the experience of the management team, the investment process, the type of investments (direct, co-investment, secondaries), the fee structure, the monthly valuation methodology for Evergreens, and the track record.

Conclusion 

Private equity offers a combination of direct influence on corporate strategy (especially compared to public markets) with long-term value creation, leading to historical outperformance. Providers have now reached a size that allows for a sporadic secondary market. Current market conditions and this broader offering make investments in semi-liquid private equity funds attractive. Outside of a mandate with high liquidity requirements, traditional closed-ended funds with a specific focus, for example, on Switzerland, can be used as satellites.

1: Source: Ritter, J. R., 2023. Initial Public Offerings: Updated Statistics, Gainesville: Warrington College of Business, University of Florida.

2: Source: KKR, measured by exit multiples

3: Source: Bloomberg, based on NTM P/E