Pantheon InFocus – Mind the allocation gap

Retail investors have historically allocated less capital to private equity than institutional investors. There are a number of potential reasons for this, including a relative lack of awareness and understanding of the asset class, private equity’s high minimum investment thresholds, difficulty accessing the best private equity managers, administrative complexity, relative illiquidity compared to traditional equity and fixed income funds, and difficulty achieving diversification through portfolio construction, all of which have been cited as key roadblocks for retail investors.

But there are two factors that could be set to challenge this situation. Firstly, the current high valuations and low yields across equity and fixed income markets – largely a result of expansionary monetary policy since the 2008 financial crisis – may spur retail investors to search for alternative sources of alpha. Secondly, some asset management firms are responding to this perceived increase in appetite for alternatives by developing private equity solutions that are more tailored to the needs of retail investors.

Despite this increased interest in the asset class, few commentators or industry players have conducted a detailed analysis of the role private equity can play in a private wealth portfolio.

This paper seeks to address that information gap. Firstly, we discuss the gap between institutional and retail allocations to private equity and the likely drivers of this divergence. Secondly, we discuss whether listed private equity investment trusts could be uniquely positioned to offer potential solutions to the challenges for private wealth investors to invest in private equity. Finally, we compare historical data for two model portfolios to show the potential impact of listed private equity on risk-adjusted performance.