Private equity – today a vital component in private clients portfolios

Institutional investors with large private equity allocations outperform in the long run.

Christian Skaanild, Managing partner

For decades, institutional investors earning top-quartile returns have had one decisive thing in common: an allocation to private equity exceeding 15% of the total portfolio. So why shouldn’t private clients harness this performance enhancer and the other advantages offered by this asset class?

Annualised broad portfolio performance over the past 20 years depending on private investment allocation

Top performers have greater exposure to private equity

We firmly believe that exposure to private equity is vital. There are four major reasons for this.

The first is the higher required returns, arising most notably from the illiquidity premium, concentrated ownership structures and returns tied to ambitious targets agreed upon by both the investment managers and the companies in the portfolio.

The second relates to the much broader investment universe than that offered by publicly quoted companies. After all, the vast majority of companies are in private hands. Moreover, many companies today prefer not to go public or to delay an IPO for as long as possible. This trend explains in part why the pool of private assets available has risen so sharply.

Next, from an investing perspective, private equity offers exposure to nascent business models and tomorrow’s champions. This is because the innovation and fresh ideas that will shape tomorrow’s business world will emerge from start-ups or those not currently in the limelight. Bear in mind that today’s largest corporations did not exist 45 years ago, and private equity was critical in funding them.

Lastly, the investment approach used by private equity managers is fundamental. It is founded on a robust investment case and foresees with great clarity the steps required to set a company on the best possible path. Contrary to investing in public markets, whereby it is highly unlikely that the fund manager will beat the benchmark for several years in a row, the best private equity firms have shown that they can consistently deliver returns that are far above the asset-class average.

The best-performing managers have seen so many companies face the same challenges that they can see very early on which mechanisms and strategic adjustments will boost growth and unlock a company’s full long-term potential. In a nutshell, access to top managers is what makes the difference. At Bordier & Cie, we have the resources, expertise and in-depth knowledge, plus unrivalled access to the strongest private equity funds on the market. This differentiation, coupled with our entrepreneurial DNA, is what positions us perfectly to construct a first-class private equity portfolio for our clients.

Top performers have steadily increased private investments allocations over time