Market Volatility Drives Demand for Private Equity Investment
Private equity investment started 2016 on a strong note, with private equity fundraising on pace to set a first-quarter, post-financial crisis record.
These estimates come from Triago, a private equity fund advisory, which concluded that the appeal of long-term, private equity investment tends to increase when public equity markets are volatile.
As most investors are very well aware, first-quarter market conditions were incredibly volatile. The S&P 500 recorded 26 moves of 1% or more from one day’s close to the next in the first quarter — double the index’s average and the sixth most for a first quarter, according to data from Convergex.
These market vacillations provided a stark reminder of the importance of portfolio diversification, including investing in alternative assets like private equity to help offset equity market volatility. This diversification strategy is not lost on retirement investors: In response to market volatility, PENSCO clients have said they plan to buy more alternative investments, including private equity, to diversify their self-directed IRA holdings.
In a client survey we conducted late last year, PENSCO found that:
Almost 62% of respondents said they had increased their allocation to non-traded alternative investments or planned to do so given 2015's market volatility.
25% of respondents said they intended to increase their allocation to alternative investments in the next five years.
These are the reasons our clients cited for seeking alternative investments in their self-directed IRAs:
Source: PENSCO Survey, November 2015
Data has shown alternative assets, like private equity, move somewhat independently of stocks and bonds, and they may increase in value if stocks and bonds fall. This correlation was on display during the 2008 financial crisis when — much to the surprise of many investors — stock and bond portfolios both suffered heavy losses.
Currently, the more uncorrelated with public markets a given private equity strategy is, the more traction it’s having with investors, according to Triago founder Antoine Dréan. In an article for Forbes, Dréan said real asset private equity funds, which focus on investments in tangible goods like real estate, fossil fuels, metal and infrastructure, have seen fundraising boosted by a hunger for yield in a low interest rate environment, and the perception of value in the depressed oil market.
Investors should always understand the risks that come with investing in any asset class, and private equity is no exception. Given that many private equity funds keep their investment information confidential, it can make conducting due diligence challenging. In addition, private equity investments are not easily liquidated and can require long holding periods.
But for retirement investors with longer time horizons, private equity can be a means of diversifying your self-directed IRA portfolios and broadening your investment strategy beyond exchange-traded assets. To learn more about investing in private equity with your IRA, download our guide.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.