Add thelocalreport.in As A Trusted Source
For most people, it is natural to assume that if something is exclusive to the wealthiest section of society, it must be better. Asset management firms seeking to access trillions of “retail” investor dollars explicitly reference this specification when marketing private equity offerings. But investors should be wary when fund marketers talk about “democratizing investing” or opening up access to areas that were previously only available to the elite.
reason to be cautious
investment Is already democratic. seconds Fixed trading commissions were eliminated in 1975, and innovation has since made investing in publicly traded stocks cheaper and easier. Online trading platforms allow people of modest means to easily purchase shares in almost any publicly traded company. The advent of cheap, passively managed mutual funds and exchange-traded funds has made it easier and more affordable than ever to build a diversified portfolio.
Besides, public capital markets are a good thing. Investors who buy publicly traded stocks or bonds get transparency about their investments along with ready liquidity. Meanwhile, private capital investments are often opaque and illiquid.
There has been much debate over whether private investment yields higher returns. Measuring the performance of private equity and private debt is not straightforward. Most industry benchmarks use internal rates of return, which are not really comparable to traditional performance measures such as total return.
Researchers have examined some findings related to this topic. Ludovic Falippo’s 2020 paper, “An Inconvenient Fact: Private Equity Returns and the Billionaire Factory,” argues that the net value of fees and returns for private equity funds has been in line with public equity markets since 2006.
PitchBook, which is part of morningstarhas also collected data on public market equivalent returns for private equity. Based on those metrics, private equity funds with 2020-2023 vintage years did not generate positive excess performance returns, although funds with 2011-2019 vintage years significantly outperformed.
Semiliquid private equity and venture capital funds
Even if private capital has outperformed in the past, there is no guarantee that these gains will continue or that those managers will outperform. As Morningstar’s Jeff Patknot notes, private equity funds typically have widely dispersed returns, meaning a big difference between the top and bottom performers. Your returns may differ significantly from the benchmark index.
As large private equity firms increasingly tap retail capital, the tools available to average investors may not be the best. Investment sage Bill Bernstein said: “The first people to invest in private equity got filet mignon and lobster tails, and the Vanguards and Fidelities of this world are going to end up with tuna noodle casseroles.”
In the case of venture capital, it’s tempting to get access to the next startup unicorn early in the game. but for everyone spacexThousands of early-stage companies never take off, and the leveraged exposure of privately held companies adds additional risk.
final thoughts
When you hear about the merits of access to investments that were off limits, it’s worth considering who actually benefits. As passively managed funds with low expense ratios continue to gain market share, asset management firms are pressured to find new sources of high-margin revenue. In many cases, that new source of revenue is you.
,
Amy C. Arnott, CFA is a portfolio strategist for Morningstar.
This article was provided to The Associated Press by Morningstar. For more personal finance content, visit https://www.morningstar.com/personal-finance