May 26, 2019

Wealth Matters: The Allure, and Burden, of Private Equity

“Let’s say you make a commitment to a manager and they turn out to be not who you think they are,” Ms. Auerbach said. “You can try to sell your slightly used private equity stake on the secondary market, or you can do your homework and make sure you can stay with the manager for 12 to 15 years.”

“Everything,” she added, “takes longer than people think.”

In the current economic cycle, advisers are urging their clients to do more due diligence and be cautious. “With at least a five- to seven-year outlook, it’s almost certain there is going to be a recession during that time frame,” Mr. Roth said.

Investors should factor in periods of volatility. “When you know you’re going to have a recession, you need a much larger margin of safety than earlier in the cycle,” he said.

To this end, Mr. Roth said, Wilmington Trust has formed partnerships with various private equity firms on behalf of its clients to make niche investments. One involved investing in distressed loans in Europe.

In another recent deal, Wilmington Trust joined forces with a private equity firm that invested only in digital and personal security companies. Its $700 million fund, entering its second year, has already returned capital from successful deals.

Uneven allocation can be a problem. As a private investment matures, managers are both asking for capital and returning money from earlier investments.

“If you have $10 and want to go into small-cap equity, you write your check and you have your $10 of exposure,” said Katherine Rosa, global head of alternative investments at J. P. Morgan Private Bank. “With private equity, you commit capital and that’s drawn down over three-, four-, five-year periods and the distributions come back to you when the manager decides to sell that position.

Article source: https://www.nytimes.com/2019/03/08/your-money/private-equity-investing.html?partner=rss&emc=rss

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