The criticism of private market performance relative to fees has been discussed at an institutional level, but how does the impending wave of retail capital fit into the debate?
Private Equity International recently caught up with Jeff Hooke, senior finance lecturer at Johns Hopkins Carey Business School, about his upcoming book The Myth of Private Equity, the fee burden of private investments and the opportunity for retail investors.
Prior to joining Carey, Hooke was a managing director at the mid-market boutique investment bank Focus Securities, capping off a long career in investment banking.
Hooke, who focuses specifically on the the perspective of institutions invested in leveraged buyout managers, disputes private equity’s claim of investment outperformance, echoing similar arguments made last year by Oxford University Saïd Business School professor Ludovic Phalippou. Investors are often unaware how much they are being charged in total fees, and most state pension funds and large endowments have not beat the performance of a 60/40 stock/bond index over the last 15-20 years, Hooke said.
When asked about the implications of high fees in the context of retail investors, Hooke said such investors are better off avoiding the asset class.
“The best protection for a retail investor, individual or 401(k) plans [is] simply to avoid private equity altogether,” said Hooke. “They’re going to get milked for fees, just like the big institutions are.”
Instead, retail investors should focus on index funds, he added, where they will get same return or better at a fraction of the cost.
Both North America and Europe represent “sizeable addressable markets” for the retail opportunity in private markets, according to a June whitepaper by Switzerland’s Ganryu Capital Partners, which noted that a 5 percent share of financial assets owned by households in the two regions constitutes nearly $7.7 trillion.
High-net-worth allocations alone represent approximately an additional $1.5 trillion-worth of assets under management by 2025, according to data from Morgan Stanley.
It can cost retail investors less than 10 basis points to invest in the S&P 500 index, and in some cases as low as 3 basis points to own an ETF that approximates it, according to Hooke.
According to a partner who focuses on the retailisation of private equity at an international law firm, strong public markets performance over the past decade is not a situation that will necessarily continue. Further, companies are staying private for longer.
“It’s clear that public markets have fewer and fewer companies and [those companies] come to public markets later than they ever have,” the partner added.
The argument that retail investors should stay out of private markets based on the past strong performance of public markets assumes that the latter will continue to be robust and attract private companies, and that the private equity and venture capital industry as a whole will not keep companies private as long as they now are, the law partner said.
“The idea that a [non-accredited investor] should miss out on all of the pre-IPO growth of the entire economy, which might have been a smaller piece 20 years ago, but now is a humongous market, would essentially mean institutions and rich people should be the only ones who benefit from emerging companies in America.”
– Find Private Equity International‘s coverage of the democratisation of private equity here.