Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Private equity opportunities may offer recession buffer, with some risk
More and more institutions are investing in private equity, and retail investors are expected to follow, lured by the potential of higher rewards and resilient returns after a recession, financial advisers say – with the caveat that with greater reward also comes greater risk.
For retail investors, there are several options to access private equity investments, including through retail and wholesale managed funds and exchange-traded funds, although managed funds typically charge a higher fee than regular equities funds.
Private equity investment can involve buying an equity stake in a growing business, granting loans to companies, or buying a private company either through outright purchase or a controlling equity stake, known as a buyout. Venture capital involves funding the growth of companies in the early stages.
Returns are generally higher in private equity than in listed equities, though risk can be too, and liquidity is lower, according to Felicity Thomas, a senior private wealth adviser with Shaw and Partners.
“Private equity allows investors access to alternative asset classes and investment opportunities that they usually wouldn’t have access to, like property syndicates and infrastructure,” she said. “Companies are staying private for longer, particularly in this current climate. So, with private equity, investors are able to get into these opportunities at lower multiples and therefore [capture] more upside.
“The risk or negative I see is that your funds are locked away for five to 10 years; however, that is generally not an issue in a self-managed superannuation fund when [investment] time horizons are longer,” Thomas added. “You just need to be aware and comfortable with the lock-up term.”
Time to ride out recession
Claire Smith (pictured), alternatives director at Schroders, said private equity can offer investors several advantages over listed shares, and returns can help to ride out share market volatility and economic recession. “The benefits of private equity have typically included offering higher returns than listed markets, greater portfolio diversification, and typically at a lower volatility,” she said.
According to Schroders, private equity funds also benefit from so-called time diversification, where capital is invested in companies over several years, allowing funds raised in recession years to pick up assets at depressed values as the recession plays out. The assets can then pursue an exit later on, in the recovery phase, when valuations are rising.
For example, the average annual internal rate of return of private equity funds raised in a recession year has been more than 14 per cent, based on data since 1980. This is higher than for funds raised in the years leading up to a recession.
Schroders’ Institutional Investor Study 2022 found that the two main reasons for investing in private equity were higher potential returns than public markets – 76 per cent of respondents voted positively on this point – and portfolio diversification, with 70 per cent responding positively.
Schroders’ semi-liquid private equity fund, which is open to retail investors for a $20,000 minimum investment, had returned 59.9 per cent cumulative since its March 2020 inception and a 14 per cent prior-year return as of September 30. Its net annualised return since inception is 20.7 per cent.
“Of course, these historical returns may not necessarily be repeated and investors need to also consider these potential higher returns against the potential risks of investing in this asset class, which includes less liquidity than listed market assets,” Smith said.
Access through managed funds
Retail investors can now access private equity investments through actively managed funds and exchange-traded funds. Investors can also get access to the sector through some superannuation funds, which are increasingly allocating more to private equity.
However, managed funds may charge a higher fee than regular equities funds because of the level of research and analysis required to source profitable private equity opportunities. “In the listed equity market, all company data is publicly available, and fund managers or individuals with a share trading account can assess this publicly available information, run their analysis, and then buy and sell companies over the stock exchange depending on their view of the company,” Smith said.
One of the most prominent local private equity investors is AustralianSuper, which says it will invest $13 billion into private equity globally over the next two years to help deliver strong long-term returns for members. The super fund – the largest in Australia – recently said it will increase its allocation to private equity to 7 per cent by 2024 from 5 per cent in May 2022 as part of its strategy to increase its investment in unlisted assets.
