Higher returns, lower volatility than public markets, access to top managers and fast-growing companies are some main drivers for the demand for private equity among the world’s ultra-high-net-worth investors.
Wealthy families and entrepreneurs allocated about 16 percent of their portfolios to PE last year, a slight increase from the 14 percent allocation the previous year, according to BNP Paribas Wealth Management’s 2021 Global Entrepreneur & Family Report.
For private equity, the story of 2020 was one of “sustained growth within the asset class”, said Richard Clarke-Jervoise, global head of private equity and private debt for BNP Paribas Wealth Management. “We not only see existing clients increasing their allocations to PE, but also a growing number of new clients making commitments to the asset class…with the US having the highest allocation, followed by Europe, Asia and then the Gulf region.”
Nearly half of “ultrapreneurs” – entrepreneurs with investable assets of at least $25 million – increased their allocations to direct private equity deals, while 39 percent upped exposure to PE funds, the report said. They did so mainly because of high return expectations and access to deals via top-performing managers.
There were 920 respondents in the survey across high-net-worth and ultra-high-net-worth entrepreneurs and multi-generation families globally, with an average investable wealth of $17.2 million.
Here are three takeaways from the survey:
PE appeals (more) to younger entrepreneurs
The appetite for PE remained highest among younger entrepreneurs or those under the age of 55. Allocations made by younger ultra-high-net-worth investors to both funds and direct investments stood at 16 percent versus only 13 percent for investors above 55, the report revealed.
Some 45 percent of younger entrepreneurs increased their allocation to direct PE deals and 39 percent to PE funds.
“There is clearly a natural affinity for the asset class for the younger entrepreneurs,” said Clarke-Jervoise. “Something we see very often with our clients – particularly in multi-generational families – is that PE is really one of the few asset classes where the next generation of clients is very keen to become involved with the management of their wealth going forward.”
Succession and wealth transfer in multi-generational families will only mean an increase in PE allocations over time, he said.
Investors learned from the GFC
“Unlike in 2008-09, where the market turbulence led families and entrepreneurs to dial back their investments in PE, last year we saw the exact opposite,” said Clarke-Jervoise. “Rather than taking their foot off the pedal and stopping their investments in the asset class, they increased their investments, learning many of the lessons of GFC.”
The report found that one in three increased their capital commitments to either PE funds (35 percent) or direct private equity deals (34 percent) during the covid-19 crisis. On the other hand, the report found one in six decreased their commitment over the course of 2020, “overwhelmingly because they found the pandemic-related risks and macroeconomic uncertainty too great”.
Clarke-Jervoise noted that PE allocations overall were higher than credit, which is a reflection of the impact of a low-interest-rate environment. “That is really pushing people to generate returns,” he said. “They are looking to move into more risky assets, higher-returning assets such as PE.”
Inflation is a concern
Families and entrepreneurs ranked inflation as the number one concern about the investment climate overall. Nearly four out of 10 respondents in the study consider it a serious risk.
The concerns varies across geographies. Inflation is a priority for Europe and Gulf-based investors, while those in emerging economies such as Poland and Indonesia – and economies with volatile currencies, including Turkey and Brazil – are particularly worried about hyperinflation.
Stock market volatility is more worrying for US-based investors, while APAC investors are concerned about high levels of corporate debt.
Families and entrepreneurs are looking to protect themselves from inflation through investments in real estate and infrastructure, as well as defensive and resilient sectors that continue to develop double-digit returns whilst at the same time having revenue streams that are inflation protected, Clarke-Jervoise said.