Billionaires plough more money into private equity

Billionaire investors are increasing their exposure to private equity in spite of concerns that the end of loose monetary policy will hurt weaker firms in the sector.

Family offices managing vast fortunes for wealthy individuals have increased their allocation to private equity from about 15 per cent in 2019 to a fifth last year — the largest gain for any asset class. Many plan to keep putting more money into private companies over the next five years, according to a report by Swiss bank UBS.

The findings, which are based on a survey of some 200 family offices that each manage more than $2bn on average, come despite worries that central banks’ effort to tame inflation by cooling the economy will expose weaker private equity firms.

“Certainly the change in monetary policy that we’re currently undergoing will have an impact on private equity. Especially what it will do is expose the funds that had principally ridden this liquidity driven rally and used leverage and fancy stories versus those who had focused on adding value,” said Max Kunkel, chief investment officer for global family and institutional wealth at UBS.

Despite these risks, Kunkel said many family offices were confident that they could still find superior returns in private markets through tighter due diligence and leveraging their longstanding relationship with top managers to gain privileged access to deals. “Nobody is being naive about this. They have been in this for too long,” he said.

Anxiety around the prospects for private equity comes as money managers, from pension to large asset managers, are pouring more money into private assets including buyout funds, real estate and private debt. Investors have been attracted by promises of higher returns and the appeal of potential inflation hedges. The private equity industry has grown to manage more than $6tn, according to McKinsey.

UBS found the gains for private equity had come as billionaires’ investment offices plan to cut back on their exposure to bonds, which have already attracted lower allocations in recent years. Faith in the traditional argument for holding bonds as a counterweight to equities has weakened, with 63 per cent of family offices saying that they believe high-quality fixed income no longer helps to diversify risks in their portfolios.

Real estate and private debt are also set to benefit as top tier investors “sacrific[e] liquidity for returns”, UBS said.

But less transparency around the performance of these typically long-term investments has drawn criticism that private equity firms are incentivised to buy and sell companies among themselves at inflated values.

Vincent Mortier, chief investment officer of Europe’s largest asset manager Amundi, last week warned that “some parts of private equity look like a pyramid scheme in a way”.

The rush of money and new players into the private equity arena, at a time when dealmakers are waiting to deploy a record cash pile amassed during the pandemic, has some investors worried that there will be more money chasing fewer good deals.

Still, Joe Stadler, head of UBS’s global family office, said its wealthy clients were confident they could select the right managers and opportunities. “The network our big clients are part of are relatively tight. Success breeds success,” he said.