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) and venture capital (VC) as an asset class. In fact, both PE and VC have grown at an average rate of 10% per year since the year 2000, with some strategies within the industry growing at double that rate.
So, how do PE and VC investments work, and why should AIs consider investing in this asset class?
Private equity is a type of alternative investment, where investors buy directly into companies that aren’t listed on the public markets. Venture capital is one form of PE that focuses on providing funding to startups and small businesses.
Over the past two decades, PE and VC have 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.
Private equity is an “alternative investment” asset class. It refers to investments in companies that are not traded on a stock exchange. Venture capital is a specific strategy under the private equity umbrella which generally focuses on investments in startups.
Other private equity strategies include growth equity, which involves investments in more established, growing companies, and buyouts, which refer to investments in mature, usually publicly-traded companies, in order to take them private.
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 Sequoia Capital, Tiger Global, 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.
Not only have PE and VC 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.
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.
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.
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.
Traditionally, market minimums in Singapore for PE and VC have hovered between $250,000 USD and $1,000,000 USD per fund, making them largely inaccessible to the average investor.
But with StashAway Reserve, investors can now invest in high-quality PE and VC funds with significantly lower amounts. We’ve made this possible for AIs with our strong network of partners, technological capabilities, and investment expertise.
Despite the comparatively low minimum investment amount, we’ll ensure AIs’ funds are well-diversified across various strategies and geographies. StashAway Reserve and its network gives AIs access to 5 to 7 of the world’s leading global players.
A prudent allocation to PE and VC gives investors exposure to the fastest-growing companies at an early stage, while avoiding concentration risk in their portfolios. Apart from PE and VC, StashAway Reserve also gives AIs exposure to angel investing and crypto.
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