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  1. Wealth
March 11, 2022

Individual investment in private equity may surpass $1 trillion this decade

By Katharine Swindells

Individual investment in private equity is forecast to surpass $1 trillion by 2025, more than twice its 2020 level.

New analysis by the Boston Consulting Group anticipates that this growth in the global private equity market will be driven by high valuations of the global equity market, low interest rates on deposits, low yields for bonds.

But, BCG warns, wealth managers and advisors need to stay ahead of the curve, and harness the latest in technology, if they want to help their clients take advantage of the private equity market.

The private equity market is already significant. As of 2020, global private equity funds stood at $5.3 trillion — accounting for almost 40 per cent of the global alternative assets under management, and two-thirds of private markets.

Globally, private equity funds grew by a compound annual growth rate of 17.5 per cent between 2015 and 2020, and are anticipated to grow by 15.6 per cent CAGR between 2020 and 2025.

Although the vast majority of that wealth is by institutional investors, individual investors are seeing stronger growth. In 2015, individuals made up eight per cent of the global private equity funds market; by 2025 they are forecast to have a 10.6 per cent share.

‘We have seen in the market that companies are staying private longer, and going public at much higher valuations,' the report reads. ‘Significant value generation happens at the stage where the companies are still private, so accessing these deals represents a tremendous value creation opportunity.’

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Overall individual investors allocations to alternatives are expected to increase 70 per cent (nearly $4 trillion) by 2025 and 17 per cent of this increase to private equity funds.

Between 2020 and 2025, individual investors are expected to increase their capital commitments to private equity funds at a CAGR of 18.8 per cent.

Between 2015 and 2020, individual investment in private equity more than doubled, from $190 billion to $493 billion. And by 2025 that number is anticipated to more than double again, up to $1.2 trillion in 2025.

The highest growth is forecast to be among the lowest wealth band of investors, as technology enables the democratisation of investing and allows more access to the private markets.

But upper and ultra high-net-worth investors (defined as individuals worth more than $30 million) will continue to make up the largest segment of individual investors, accounting for half of the market, with forecast CAGR of 19.5 per cent between 2020 and 2025.

Much of the growth is predicted to come from the Asia-Pacific, which between 2015 and 2020 had a CAGR of 26 per cent, and by 2020 account for 27 per cent of the private equity individual investor market. This growth is expected to continue and by 2025 they are forecast to make up 37 per cent of the market, while Europe and North America’s shares decrease.

Mainland China makes up more than half of the Asia-Pacific investment, and is forecast even higher growth of 29 per cent CAGR between 2020 and 2025.

According to Boston Consulting Group, this increase is being driven by the uncertainty in the general market, which is leading UHNWs and high-net-worths (defined as individuals worth more than $1 million) to look for alternative sources of returns and portfolio diversification that offers more stable performance. It is also encouraging them to be more willing to commit to illiquid assets.

Historically, alternative assets delivered solid returns over a long period of time. Analysis by the Cambridge Associates US Private Equity Index finds that, on a net basis, private equity has outperformed public market equivalents by upwards of 3 per cent.

But within that figure hides wide discrepancies: while the top quartile of funds achieved a 20 per cent return over the past 15 years, the bottom quartile achieved below zero per cent return, showing the value of having strong expertise when investing in private equity.

The number and quality of fintech products in the private equity space are serving to democratise the sector, making it easier than ever for clients to buy in. More than ever, wealth managers need to be sure they have a clear service model that makes it easier than ever for clients to access the highest quality funds that have historically been closed off to many individual investors.

‘Still, high-net-worth clients seek the advice of their trusted relationship managers, relying on their expertise and knowledge when it comes to investing in this highly complex asset class,’ the report says. ‘The wealth management private equity opportunity is there, and it requires the key market actors to act boldly to catch the upside.’

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