Private Equity 101

Private equity investments are more relevant than ever. Volatility continues to rise thanks to tensions between the USA, China, and Mexico. With the VIX moving higher, it is smart to invest in assets that are uncorrelated with the stock market.

Alternative investments are a good foil for stock market volatility, offering decent, uncorrelated returns.

The recent tweets from President Trump and response from Chinese media have put in doubt the immediate resolution of the trade conflicts between the two countries.

Mexico has re-entered the controversy.

Analysts have dismissed serious economic damage due to the prospect of Chinese stimulus and the Fed’s dovish stance.

Nevertheless, markets are volatile and investors should trim equity exposures to safeguard from any major untoward events.

Private equity investments are a sound option

“Alternative investments can provide many benefits to investors, ranging from potentially higher returns to lower risk and better diversification than may be available from a traditional portfolio.” – BlackRock.

Indeed, over the long term, alternatives as an asset class have generally given superior returns compared to cash and fixed income. However, compared to equities, alternatives have delivered lower returns, albeit at a lower risk.

Private equity’s advantages

PE investments do not list on exchanges. As a result, they are less liquid than stocks. Often PE firms will take a listed company private, or buy an existing private company. They will then restructure the company to boost profits and add value to their investment.

One serious advantage of private companies is that the field is much larger compared to the number of listed companies, thereby offering a wealth of opportunities.

Apart from the previously mentioned benefits of diversification and non-correlation, private equity has consistently outperformed listed equities over the period from 1993 to 2016.