Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 301

Private equity grows as listed companies are only the tip of the iceberg

Private equity is not an asset class at the top of most individual investors’ wish lists. Why? It is certainly an asset class people are aware of. It gets a lot of press, and it is an asset class that large institutional investors value and allocate to. The Future Fund, for example, has a 15% allocation to private equity.

So why don’t individual investors invest significantly in this asset class? The overriding theme is that it is too hard to access. Reasons may include a lack of suitable investment vehicles which would enable investors to obtain meaningful and diversified access. The investment process is also complicated by minimum equity commitments, the management of progressive drawdowns, irregular distributions, and long-term lock ups.

What is private equity?

Private equity typically involves taking an ownership interest in an unlisted, private business or asset. It includes a broad range of longer-term and company-specific exposures which, because they are not listed on a public market, tend to exhibit somewhat lower correlation to traditional stock and bond markets. Private equity managers seek to generate superior returns through taking an active role in monitoring and advising companies through restructuring, refocusing and revitalising tactics in order to sell the investment at a profit. It is a more hands-on investment compared to an investment in the shares of a listed company.

It may surprise some that the universe of private companies is significantly larger than that of public companies, and that the number of listed companies has been steadily decreasing. As shown in the following diagrams, since 1996 the number of US listed companies has fallen 50%.

Source: S&P Capital IQ

Global allocations by investors to private equity have been steadily growing since 2000, having increased almost 6 times over the period.

How has private equity performed?

One of the key reasons for the increasing allocations to private equity may have been its performance. Private equity has outperformed public equity across long term time horizons (10 and 20 years) as well as geographic regions. The following graphs compare private equity investments against hypothetical funds that buy and sell shares of the relevant equity index at the same time the private equity vehicles call and distribute cash.

Source: GCM, using data from Burgiss Group and MSCI

There are a number of factors that have historically contributed to the strong performance of private versus public equity. The most significant are:

  • the lack of short-term public pressure allowing for a long-term investment orientation
  • the historical resilience of performance across various market environments
  • the illiquidity premium – investors prefer liquid investments and therefore demand an increased return on less liquid alternatives.

Five ways the risks are different from listed equity

The unlisted and hands-on nature of private equity investments suggest there are different risk considerations compared to public equity markets. Some risks are of course the same – economic, market, currency, political, etc. – but others differ, and we highlight these below:

  1. Unlisted private equity investments are typically illiquid. Private equity funds may hold securities or other assets in companies that are thinly traded or for which no market exists.
  2. Distributions tend to be irregular and depend on the sale of an underlying investment.
  3. Third party pricing information is also not available for a large proportion of private equity assets. Valuations may therefore require discretionary determinations and in certain circumstances investors may have to rely on valuations from the underlying managers themselves.
  4. The companies invested in may involve a high degree of business and financial risk. They may be in the early stage of development, may be rapidly changing, may require additional capital to support their operations, or may be in a weak financial condition. While these are also opportunities, they clearly represent risks that need to be controlled by private equity managers.
  5. There is also generally less information available about private companies than their listed peers. This means that investors with higher quality information are often able to make better investment decisions and is one of the reasons performance dispersion in private equity tends to be greater than in the public markets. Extensive due diligence and careful monitoring are essential safeguards when constructing private equity portfolios.

What does private equity bring to a diversified portfolio?

Historically, one of the key benefits of private equity has been its somewhat lower correlation to other traditional assets and the diversification benefits this has provided at a portfolio level. The chart below shows that adding a 20% allocation of private equity to a traditional 60/40 equities/bond portfolio generated higher returns with lower risk (as measured by volatility) over the last 20 years.

Source: GCM using data from Burgiss Group

To an extent, the diversification may be derived from periods of economic stress such as the GFC.

How can retail investors access private equity?

Private equity has been a difficult asset class to access for individual investors. However, there are now a handful of unlisted and listed funds and trusts in Australia that overcome many of the hurdles.

Listed and unlisted vehicles have their own pros and cons, but the key is liquidity. Unlisted funds may offer daily or monthly liquidity, however, given the illiquid nature of the underlying investments, they have the ability to restrict or freeze redemptions. Listed vehicles provide liquidity for investors who can buy and sell on market as long as an active market exists.

The private equity universe is vast, differentiated by types of companies, investment strategies, and implementation options. Private investment vehicles differ markedly across these variables and, as with listed equity vehicles, it makes sense to have more than one in your portfolio.

 

Nick Griffiths is the Chief Investment Officer of Pengana Capital. This article is for general purposes only and does not consider the circumstances of any investor.

RELATED ARTICLES

How individuals can build a private markets portfolio

banner

Most viewed in recent weeks

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Latest Updates

Superannuation

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Investment strategies

The two best ways to maximise dividend income

People often marvel at Warren Buffett now getting 60 cents in annual dividends on every dollar he invested in Coca-Cola 30 years ago. What’s often overlooked are the secrets to how he achieved this phenomenal result.

Taxation

The fetish for lower taxes has gone too far

Since the time of Reagan and Thatcher, most business leaders and investors have clung to a dogmatic belief that lower taxes bring higher profits and economic growth. The truth, as always, is far more complicated than that.

Superannuation

Meg on SMSFs: Winding up market linked pensions with care

Due to recently-introduced rules, many people with old style pensions, also known as legacy pensions, will look to wind them up this year. The temporary amnesty allowing these pensions to be stopped should be navigated with care.

Property

Why our Torrens title property system hasn't been adopted elsewhere

Far from an outdated relic, Torrens title appears to be the revolutionary, cheap, low-risk way to handle property dealings. Here's a look at why this Australian invention from the 1850s hasn't caught on more widely.

Property

DigiCo REIT and the data centre opportunity

Data centres offer compelling growth prospects. But their potential hasn't gone unnoticed, and the DigiCo appears to be buying properties in a seller’s market, resulting in better opportunities being found elsewhere.

Retirement

The $1.2 trillion sea change facing Australian investors

Over the next decade, three million Australians will shift from accumulating wealth to living off it. Those taking part in the great migration need a sound strategy that delivers sustainable income and protection from market bumps.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.