Private equity has been on a tear for the past few years. While Mega Caps have soared and Small Caps have languished, 100’s of companies, such as SpaceX, Xai, Anthropic, Stripe, etc. have quietly been raising billions of dollars each year, mostly from Institutional and High Net Worth (HNW) investors.
Notably, retail investors have been absent from the party. Net worth restrictions, limiting participation to accredited investors, keep small-time investors on the periphery, but even wealthy investors often eschew private equity ownership. Long holding periods, high transaction costs, sparce information, and large minimum commitments prevent many would-be investors from engaging in these transactions. Yet money continues to pour in. According to Pitchbook, close to $300B entered the private equity (PE) market in just Q1, 2024, representing 53% of all capital raised. This amount comes despite the difficult exit environment (weak IPOs) and slow distributions.
Clearly, many seasoned investors see something they like. The estimated PE Assets Under Management (AUM) now exceeds $5.5 trillion (Pitchbook) with more coming in each year. This investment category has experienced substantial growth in AUM which has more than doubled over the past decade. Much of the growth derives from insatiable investor appetite that seeks higher returns and diversification.
Currently, there are more than 1,100 private companies that trade in the secondary market with a capitalization greater than $1B. Further, more than 100 private companies trade in the secondary market with a market capitalization greater than $10B. This latter value reflects the demarcation for “Large Cap”, placing these 100 companies in the highest investment echelon.
But why the surge in private equity? What makes this investment category so special? Data from the CAIA provides a compelling argument that private equity performance over time substantially outperforms public equity. In the 23 years from June 2000 to June 2023, state pension private equity performance provided an 11% annual return compared to 6.2% for public stocks. Though it may be unfair to assume that every 20+ year performance stream will demonstrate a near doubling of investment performance of PE over public equity, the 4.8% annual differential can certainly justify the investor demand.
But how can the retail investor share in these returns? Currently, the retail investor has scant few options. One vehicle might be found in a closed-end mutual fund. Though close-end funds may be simple to purchase, they often sell for a premium to net asset value. This means that a stock that might be worth $5 per share, could sell for $10 or even $15 per share in a closed-end fund. Moreover, fees might be high (2.5% or 3%) and many funds come with minimum investment requirements or limited redemption opportunities (quarterly).
But private equity investment solutions for retail investors may soon be available. Innovation leaders, such as EntrepreneurShares are now developing a product and attempting to craft a solution.
Retail investors deserve an opportunity to share in the rewards of private equity. Hopefully, such a solution to level the investor playing field will soon become available.
