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But for seasoned investors, including family offices, wealthy individuals and institutional clients, there’s no alternative to alternative assets, such as private equity and hedge funds. Diversifying portfolios is becoming essential in building resilience. One downside investors must deal with is illiquidity. Yet, a simple shift in perceptions can cast this in a different light. Illiquidity can add value during volatile cycles. Private assets can protect investors against their own biases, locking them in for an entire cycle or longer and removing the temptation to sell at the bottom of the market.
However, at the depths of the global financial crisis, private equity suffered smaller losses than public markets. It also returned to pre-crisis value in just two years, a point when public equity markets were still down 20 per cent. This was not a one-off – Bain & Co. data shows that investors in global private equity buyouts consistently outperformed long-term averages in the years following a marked downturn.
In better times, transactions between different funds have allowed private equity managers a route to liquidity. And while concerns exist over what some see as a game of musical chairs, it is important to differentiate between cases of “pass-the-parcel” deals and those companies attracting capital for innovation or buy-and-build strategies that are supported by management teams recommitting capital.