Understanding Private Equity for Investors in Hong Kong

In 2014, Facebook (now Meta) purchased messaging app WhatsApp for $22 billion USD. This was a record-breaking deal even for cash-rich Silicon Valley, and remains among the largest tech acquisitions in history. Sequoia Capital, WhatsApp’s only venture investor, emerged as a big winner from this transaction – it turned its $60 million USD investment into over $3 billion USD, equivalent to a roughly 50x return.

Over the past two decades, technological innovation has reshaped many industries and changed the way we live. The emergence of tech companies valued at hundreds of billions of dollars has sparked tremendous growth in private equity (PE) as an asset class. In fact, private equity, as an asset class, has averaged a 14% annual return over the past 10 years, with some strategies within the industry growing at double that rate. So, how do PE investments work, and why should investors consider investing in this asset class?

Key takeaways:

• Private equity is a type of alternative investment, where investors buy directly into companies that aren’t listed on the public markets. 
• Over the past two decades, PE has outperformed investments in the stock markets and other private assets such as real estate and private debt.
• Institutional and high net worth investors tend to have allocations to PE within their portfolios, because of its potential to provide higher expected returns and lower volatility.
• That said, it can take years for a PE fund to evaluate and improve the companies it’s invested in. So investors should expect longer holding periods before a PE investment sees a positive return.

What is private equity?

Private equity is an “alternative investment” asset class. It invests in non-public companies, including buyouts and growth investments. These investments focus on optimising operations or improving financial performance over 5-10 years to generate superior long-term returns for investors.

How does investing in private equity work?

PE investments are usually organised through a fund. The fund manager, called the general partner, raises money from external investors, which are called limited partners. The general partner then also invests some money into the fund. Some well-known fund managers across the world include CVC, EQT, Carlyle, KKR, and Blackstone.

After raising the money, the general partner begins evaluating a large number of potential investments based on the strategy and target geography of the fund. PE funds usually evaluate hundreds of potential investments every year and end up investing in a very small number of companies. PE fund managers typically aim to invest the money within the first 5 years.

Once the fund has invested in the companies, the team focuses on working with each company to improve business strategy and increase cost efficiencies, among other things. The fund manager then searches for potential exit opportunities to sell its stake in the companies and return money to investors, after fees. Exits typically happen between 4 to 7 years after the initial investment.

Why invest in private equity?

PE have outperformed other asset classes

Not only have PE outperformed investments in stock market indices, they’ve also outpaced other private assets such as private debt, real estate, and real assets across multiple time horizons.

There’s a declining number of public companies

The number of publicly-listed companies has declined in many countries around the world over the past 20 years. More companies are choosing to stay private – especially those with less than $250 million USD in annual sales. Other companies are waiting longer to list on stock markets. This means that earlier investors are earning larger returns on their money than stock market investors.

PE adds diversification to portfolios

Including PE in a portfolio can result in higher expected returns with lower volatility. It’s no wonder that institutional investors such as university endowments and sovereign wealth funds have allocations of between 18% and 35% to private markets. Harvard University’s endowment, for example, had an allocation of 34% to private equity in 2021. In comparison, ultra-high net worth and high net worth individuals have historically had lower allocations to private markets because of the high minimum investment amounts and restricted access.

When can investors expect a return on private equity investments with a traditional closed-end structure ?

An investor commits to investing a certain amount of capital to the fund, but doesn’t pay the money out at one go. The fund manager usually makes a call for capital each time it’s close to making an investment in a company, so investors pay out the capital gradually over the first few years.

Since finding companies and improving them takes time, the investor typically sees a negative return on investment during the initial period. But, once the fund is able to exit the investments, it begins distributing money back to investors. The investor in the fund then receives cash, getting a return on his or her investment.

How does evergreen private equity investments differ from traditional private equity investments? What are the benefits for you? 

Key benefits to you as an investor:

• Increased Liquidity: The periodic subscription and redemption opportunities offer greater flexibility for investors compared to the illiquidity of traditional PE which has a long lock up period.
• Smoother Investment Process: The continuous flow of capital reduces the need for unpredictable capital calls, making portfolio planning easier for investors.
• Reduced J-Curve Effect: The continuous investment and harvesting cycle can potentially mitigate the J-curve effect (initial negative returns followed by positive returns) often seen in traditional private equity.

Investing in private equity with StashAway Reserve in Hong Kong

1. Start investing with lower minimum amounts

Traditionally, market minimums in Hong Kong for PE have hovered between $250,000 USD and $500,000 USD per fund, making them largely inaccessible to the average individual investor.

But with StashAway Reserve, investors can now invest in high-quality PE funds with significantly lower minimum amounts, which is only a fraction of the traditional minimum. In the meantime, you will still enjoy the enhanced liquidity benefit given the semi-liquid structure of our private market products.

2. Transparency: Invest with no hidden fees and no upfront fees

We provide institutional class access to customers, which means that the fund level fee itself is significantly lower than the retail class. Plus, StashAway only charges a flat platform fee while providing superior access and managing the subscription, distribution, and redemption processes for you. Investing in private markets has never been simpler.

Apart from PE, StashAway Reserve also gives Professional Investors exposure to private credit and other alternative investments. Ready to start your investment journey with StashAway Reserve?

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