Between 1986 and mid 2023 (6/30/23), U.S. Private Equity as an asset class produced average annual returns of 14.3% while the S&P 500 produced 9.5% percent. That’s nearly 50% greater compounded annualized returns. On a global level, private equity has outperformed global stock markets over various time periods over the last 35 years. This performance has driven trillions of dollars of investment into private asset managers who benefit greatly from the management fees and performance fees they collect.
Another key driver for the future of Private Equity is that fewer companies are going public. The number of publicly traded U.S. companies has fallen by nearly half, from over 8000 in 1996 to less than 3800 today. Today, approximately 87% of companies with over $100 million in annual revenue remain privately held.
While institutions have been using alternative investments for decades, the vast majority of individuals are under allocated with as little as 3% of their portfolio in alternatives. This is changing dramatically as people seek out uncorrelated investments like Private Equity, Private Credit and Private Real Estate, to complement their traditional stock and bond portfolios. This democratization of alternatives is predicted to cause trillions in new capital to flow into alternative investment managers.
Taking Advantage of Private Markets
How does one take advantage of this massive shift toward the private markets? One approach is a category called “GP Stakes.” This entails owning a minority stake or interest in the actual asset management company that is managing investors’ money within Private Equity, Private Credit, Venture Capital and Private Real Estate. These are known as the General Partners or GP’s in a typical fund structure.
These asset managers generate revenue by charging their investors (the limited partners of LPs’) two separate fees: management fees and performance fees. Like the shareholders of any business, the owners of a GP stake get to share in the profits on a pro rata basis.
So why can it be more attractive to be a GP, a General Partner, than an LP, a Limited Partner?
A typical asset management company manages numerous fund vehicles on behalf of investors, the LP’s. The investors often agree to “lock up” their investments for longer periods of time in exchange for the potential of outsized returns. This can generate predictable cash flow for the firm and it’s GP stake owners .In addition, the GP receives a handsome percentage of the profits, typically 20 percent, on all the capital they manage. This can be quite significant if the funds they manager perform well.
Lastly, GP stakes owners receive significant diversification. The LPs choose to invest in each individual fund vehicle (or “vintage”) whereas the GP is the manager of all the company’s funds, past, present and future. Each of those funds has a unique start date or “vintage,” which means they are spread across various market/economic cycles. Beyond that, each of those funds contains its own portfolio of companies/ investments spread across various industries, sectors, geographies, and stages of growth.
If you zoom out, the global total allocation to alternative investments is approximately $25 trillion. This is estimated to grow to $60 trillion by 2032. This is why we believe that GP Stakes is an ideal strategy to take advantage of these significant tailwinds.
- Between 1986 and 2022, the Private Equity asset class has significantly outperformed the S&P 500 (14.28% vs 9.24%)
- 87% of companies with over $100 million in annual revenue are private as fewer companies are opting to go public
- The number of publicly traded U.S. companies has fallen by nearly half to around 3,800, since the peak in 1996
Method: The index is a horizon calculation based on data compiled from 1,505 funds, including fully liquidated partnerships, formed between 1986 and 2022.
Private indexes are pooled horizon Internal rate of return (IRR) calculations, net of fees, expenses, and carried interest. CA Modified Public Market Equivalent (mPME) replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportions as the private fund, and mPME NAV is a function of mPME cash flows and public index returns. “Value-Add” shows (in basis points) the difference between the actual private investment return and the mPME calculated return. Constructed Index: MSCI World/MSCI All Country World Index: Data from 1/1/1986 to 12/31/1987 represented by MSCI index gross total return. Data from 1/1/1988 to present represented by MSCI ACWI gross total return. The timing and magnitude of fund cash flows are integral to the IRR performance calculation. Public indexes are average annual compounded return (AACR) calculations which are time weighted measures over the specified time horizon and are shown for reference and directional purposes only. Due to the fundamental differences between the two calculations, direct comparison of IRRs to AACRs is not recommended.
Sources: Cambridge Associates LLC, MSCI, Standard & Poor’s.
PAST PERFORMANCE IS NOT A GUARANTEE OF CURRENT OR FUTURE RESULTS. Historical examples shown do not, nor are they intended to, constitute a promise of similar future results. The information and statistical data contained herein are taken from sources believed to be accurate and have not been independently verified by CAZ Investments. Historical examples are provided for information purposes only and are not intended to represent any particular investment.
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