Is private equity the solution for diversification?
With volatility drastically affecting every asset class during the COVID-19 pandemic, private equity could be an alternative avenue for portfolio diversification that provides lower volatility, Schroders believes.
Claire Smith, Schroders Australia alternatives director, said the advantage of private equity was the less frequent valuations which dampened volatility significantly.
“You also remove that psychology from the stock market – there’s all that press about Robin Hood traders and they may only be investing $100 but if you get 100,000 of them investing it can add a lot of sentiment to the market,” Smith said.
“What we do like about private equity is you do remove some of that sentiment and noise, and the emotion from public markets.
“What we really like about private equity and why we think it can dampen volatility is that private equity transactions take months to come to fruition.
“As a component to an overall equity portfolio, what it can really do is dampen the volatility across the whole portfolio.”
Smith said there was still a reduction during COVID-19, due to the changing fundamentals of the market, but the reduction was significantly softened versus listed markets.
However, there was also other impediments to overcome to make it accessible for retail investors.
“Typically, private equity has quite a high minimum, we have created a retail fund and we’re also getting onto various platforms which significantly reduces the minimum,” Smith said.
“While we do see this as a sophisticated investment, we understand that people want diversification within their portfolio.
“The other impediment is the long lock-up period, we’ve created liquidity so people can access their capital if they need to.
“However, it is still a relatively long period – a period of months – to get your capital back, although not years like with previous structures.”
AUTHOR
Chris Dastoor
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