In the current post-pandemic reality, wealthy clients are looking for fresh ideas for successful investments. Against this background private equity instruments. That is direct investments in promising non-public companies with significant growth potential, received a new round of development. What should clients consider on private equity market?
Private Equity and HNWI
The global private equity market is steadily growing every year as high yields attract investors. By the end of 2020, the market was worth $4.7 trillion and Global Data forecasts. It will grow at an average annual rate of 7.4% over the next three to four years. High net worth individuals with wealth between $1 million and $5 million allocate only 3.4% of their capitals to this market. Digitalization will provide easier and more efficient access to private equity tools regardless of the country of presence.
This is likely to change in the near future. The development of online channels and improvements in investment processes and procedures (end-to-end technology, reporting, due diligence) will facilitate access to this tool and remove some of the barriers to market development. In addition, in the post-pandemic period, among high net worth individuals, the search for instruments with high yield and low correlation with traditional assets, i.e. stocks and bonds, is becoming increasingly relevant. It is precisely private direct investments in non-public prospective companies that have become the beneficiaries of the “new reality.
Shares of the high net worth individuals
In 2020, the share of capital of dollar millionaires with wealth up to $5 million in the private equity segment grew to 3.4%. And this instrument now occupies the largest share in the average alternative investment portfolio of high net worth individuals. Traditionally, investments in private equity funds, rather than directly in companies, are more popular among them. It is worth noting that the format of investment in individual companies is more common among UHNWI (ultra-high-net-wealth-individual, wealth $30M+). For example, JPMorgan offers the opportunity to invest directly in individual companies for clients with assets in the bank of 50 million dollars. But most experts think that private equity investment format through funds is still more suitable and comfortable for private investors. In this case, diversification is used more widely and entry thresholds are much more comfortable. This allows access to a sufficiently large number of funds with different strategies at the same time.
Differences high net worth individuals
In terms of popularity and penetration of private equity in portfolios of private investors, the difference between regions and countries is significant. Thus, investors in Europe have the highest exposure to private equity. The UK is in first place with 8.8%, followed by Germany with 5.3%. By the way, according to the forecast, GlobalData experts expect in this region the most intense growth of demand for private equity among high net worth individuals. In the Asia-Pacific region, the picture is different. Experts predict in India an increase in demand and allocation from 5.1% in 2020 to 7.6% in 2022. By contrast, in China, only 2%. In the U.S., growth is projected to be moderate, from 2.8% to 3.3%.
