Private equity and venture capital investments can strengthen your portfolio in times of recession. That’s especially relevant now, with growing concerns of a recession looming. Russia’s invasion of Ukraine, rising inflation, and the S&P 500 falling into a bear market are just some of the factors driving these concerns.
Markets are cyclical and volatile, so diversifying your asset class exposure and the timing of your entry points into the market are the best way to achieve long-term returns. Even when it seems like all asset classes are declining, we believe there are still investment opportunities to be found. Here’s why private equity (PE) and venture capital (VC) are among the asset classes that can help to recession-proof your portfolio.
PE and VC tend to outperform other asset classes during periods of volatility and broader equity market contraction.
Downturns allow investors to enter the market at more favourable valuations.
The PE market is backed by a large amount of cash reserves that companies can draw upon to tide them through a crisis.
The long holding periods of PE and VC investments reduce the likelihood of investors panic-selling during a downturn.
US state pension plans, which are among the world’s largest institutional investors, have found that PE outperformed public equities by 440 basis points on average per year. During the bear market periods of 2002-2003 and 2008-2009, the outperformance increased to 660 basis points.
There are 3 reasons that PE and VC tend to outperform public markets during recessionary environments:
PE and VC valuations become more favourable in recessionary environments
PE-backed companies have greater access to financing that can help them weather economic downturns
PE markets are illiquid, which makes it less likely that investors panic-sell during downturns
Public and private market valuations have grown rapidly in recent years. But now, with the current market downturn, we’re seeing public companies’ valuations decline, and to a lesser extent, private market valuations.
What does this mean? Investors can now invest in private markets at more favourable prices – with the potential of greater returns.
The PE market is currently backed by a large amount of cash reserves, or “dry powder”. How large is “large”? We’re talking to the tune of approximately $1.5 trillion USD that’s still available for investment. This financial buffer protects PE-backed companies from losing value. During a recession, public companies are more than 2x as likely as PE-backed firms to experience a catastrophic loss – which happens when a company loses over 70% of its value.
Thanks to this dry powder, PE-backed companies can recover faster from crises and gain more market share compared to their non-PE peers. They’re even able to take advantage of lower valuations to acquire new companies. In contrast, public companies often avoid making acquisitions during recessions.
On top of that, PE fund managers are often highly-experienced industry specialists who can identify difficulties early and give advice on navigating companies through a crisis. This active, hands-on approach gives PE-backed companies the support necessary to weather economic and market downturns.
PE and VC investments have a holding period of at least 2 to 5 years, which allows PE funds to wait for more favourable market conditions before they sell their investments. This holding period also prevents investors from panic-selling during downturns. Longer holding periods, combined with less frequent asset valuations, reduce the volatility of returns over time.
Surveys show that investors continue to be upbeat about the PE and VC markets:
After the COVID-19 market crash, 91% of investors intended to maintain or increase their exposure to PE over the long term; and
And, this year will likely continue to offer many private market investment opportunities. Not only are PE and VCs more attractive in recessionary environments, but they can also continue to grow and reduce volatility in an investor’s portfolio in any economic environment.
So, we’ve established that PE and VC provide valuable diversification in an investor’s portfolio. And we’re excited to share that Accredited Investors (AIs) in Singapore can now invest in top-tier PE and VC funds through StashAway Reserve. Reserve provides AIs diversified access to private markets at investment amounts that are significantly lower than market minimums.
Ready to start your PE and VC investing journey with StashAway Reserve?