According to The Ultra-High Net Worth Private Equity Investing Report 2023 by Campden Wealth and Titanbay, 84% of ultra-high-net-worth (UHNW) investors hold private equity investments, with a further 10% interested in the asset class.
The report, which is based on the responses of 120 family offices and private individuals, found that the primary motivation for investing in private equity is enhanced long-term portfolio returns.
“That’s a statistic that was much more than I thought it would be,” says Adam Harrison, head of strategic partnerships at Titanbay. “The report found that 67% are driven by the desire to enhance returns when including private equity in their portfolios (the number one motivation).”
Additionally, the report found that investors are diversifying portfolios with private equity investments to reduce their exposure to market volatility (for 37% of participants, the number two motivation), and, especially for investors with operating businesses, to obtain exposure to emerging technologies / new industry developments (for 25%, the number three motivation).
In 2021, private equity portfolios of those surveyed generated an average 24% net internal rate of return (IRR), with buyouts performing particularly strongly (31% IRR), followed by growth equity investments and special situations (25%).
Currently, the average UHNW investor allocates 20% of their overall portfolio to private equity. However, on average, investors plan to increase their private equity allocation by an additional three percentage points to 23%.
“A key finding from the research was the remarkable growth in private equity investing,” says Harrison. “For many, allocations had doubled over the past two years and investors were looking to continue increasing their private markets exposure as a key driver of long-term performance. It is clear that appetite for the asset class, along with investor sophistication, is increasing at a rapid pace.”
Generally, UHNW investors are diversified across strategies, but they are leaning towards growth opportunities. On average, they allocate 21% of their private equity portfolios to venture capital, 28% to growth equity, 26% to buyouts, 11% to special situations. The most popular sectors for investment include information technology (with 70% of participants holding investments in this sector) and healthcare (67%).
Surveyed investors have outlined their intention to make approximately eight new investments over the next 12 months: on average, three funds and five direct deals. On the fund side, there is a stronger focus towards relatively smaller private equity funds (with 62% favouring funds with less than $250 million in assets under management and 42% favouring funds managing between $250 million and $500 million in assets).
“UHNW investors are taking a sophisticated approach to constructing portfolios, seeking out diversification across strategy, geography, vintage and fund size,” says Harrison. “As we see from the wider investment market, healthcare and technology have proven to be very popular and attractive sectors.”
One-third of investors surveyed hold ‘responsible’ private equity investments, and, on average, allocate 24% of their PE portfolios to such investments. For the bulk of the investors, these ‘responsible’ investments are outperforming traditional ones (59% of applicable participants).
“This is a significant finding. It adds to the growing evidence that there does not need be a trade-off between financial return and impact,” says Dominic Samuelson, chief executive officer of Campden Wealth. “26% of participants are exploring opportunities, and, within five years’ time, the average allocation is expected to rise to 38%.”
The biggest investment risks in the next two years are geopolitical / trade tensions (26%) for participant UHNW investors. Risk of a recession in core markets and escalating inflation are relevant to 24% and 12% of respondents, respectively.
However, participants stress that they are patient investors with long-term strategies, who do not place undue weight on short-term market noise.
“Define your liquidity needs and risk tolerance before deploying capital; set a strategy and follow it consistently, and throughout the journey, focus on education and building relationships,” says Dominic Samuelson summarising the advice. “Based on the report’s findings, this is how quality deal flow is generated, due-diligence power is increased and risk of loss is mitigated.”