Due to securities law restrictions and high investment minimums, investors in private equity funds fall into two groups; institutional investors and high-net-worth individuals.
Institutional players
The main institutional players are pension funds, endowment funds and sovereign wealth/national reserve funds. All three are looking to maximise long-term returns – albeit for slightly different reasons – and all three are increasing their private equity allocations.
Pension funds
Pension funds have a singular goal: to fund the pension payments promised to employees when they retire. The long horizon of this goal and the steady stream of new employees requires pension funds to seek predictable returns and gives them the ability to take a long-term view on investing. As a result, pension funds usually have an allocation to private equity, which averages around 9% overall today¹.
Endowment funds
An endowment fund is a pool of capital established by a foundation, typically held by a non-profit organisation such as a university, charity or hospital. The organisation makes consistent withdrawals for a particular purpose and the fund is often designed to continue indefinitely.
One well-known example is the Yale University endowment fund, previously run by the late David Swenson and long-considered as a benchmark for strong returns and astute asset allocation. When Swenson took over in 1985, the fund had about 80% allocation to US equities and bonds, with zero private equity. Today, the fund targets a 41% allocation to venture capital and leveraged buyouts, with US equities, bonds, and cash making up less than 10%².
State-owned investment funds represent an enormous pool of capital, often held by a central bank, giving it significant economic importance. Since the goal of the ruling authority is the ongoing running of a country, the time horizon for investments is again very long.
The allocation of sovereign wealth funds to private equity is not only considerable, but it is also growing. Recent research aggregating the 35 largest SWFs found that allocation to private equity grew from 12.6% to more than 28.3% in the last two decades³.
Smaller players
Even with the high minimums typically required to invest in private equity, there are some individuals - or families - that can afford it. They make up a fraction of the total assets under management in private equity, but they have still found access through traditional means for decades.
Ultra-High-Net-Worth individuals and family offices
Ultra-High-Net-Worth individuals are those with investable assets over $30 million, and there are just under 300,000 such people around the world⁴. Much of this wealth is controlled by management firms called “family offices”, so here we will consider them as a single group.
In a Goldman Sachs survey of family offices, there was an average asset allocation of 24% to private equity⁵. KKR research found similar results, with 27% of respondent’s portfolio in private equity⁶. Both surveys noted that the allocation to private equity is likely to increase.
Individual investors
Until recently, the high investment minimums required to tap into private equity had been an impenetrable barrier to entry for individual investors. This was the case even for many high-net-worth Individuals (the estimated 13 million individuals globally worth over $1 million⁷) since minimums have historically been in the millions or tens of millions.
Now, through Moonfare, it is possible to access the private equity market with as little as €50,000. Moonfare aggregates individual demand into feeder fund structures, which then invest directly into the underlying target funds. Moonfare also facilitates a secondary market to provide limited liquidity (though not guaranteed) for its investors.
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Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.
Who can invest? A private equity fund is typically open only to accredited investors and qualified clients. Accredited investors and qualified clients include institutional investors, such as insurance companies, university endowments and pension funds, and high income and net worth individuals.
Even with the high minimums typically required to invest in private equity, there are some individuals - or families - that can afford it. They make up a fraction of the total assets under management in private equity, but they have still found access through traditional means for decades.
Most private equity money comes from institutional investors, such as pension funds, sovereign wealth funds, endowments, and insurance companies, although many family offices and high-net-worth individuals also invest directly or through fund-of-funds intermediaries.
Individual investors are sometimes told by fee-based advisors that they can purchase “institutional” share classes of a mutual fund instead of the fund's Class A, B, or C shares. Designated with an I, Y, or Z, these shares do not incorporate sales charges and have smaller expense ratios.
In addition to meeting the minimum investment requirements of private equity funds, you'll also need to be an accredited investor, meaning your net worth — alone or combined with a spouse — is over $1 million or your annual income was higher than $200,000 in each of the last two years.
There are several ways to branch into private equity investing, including through mutual funds, exchange-traded funds, SPACs, and crowdfunding. However, keep in mind that many private equity opportunities are only offered to qualified investors and may require a sizable minimum commitment as well as a high net worth.
Non-accredited investors are also able to invest in private businesses, but these opportunities are limited and subject to other requirements, such as additional disclosures related to the investment.
The short answer: A private investor is a person or company that invests their own money into a company, with the goal of helping that company succeed and getting a return on their investment.
An institutional investor trades large volumes of securities on behalf of an individual or shareholder. This large-volume trade motivates brokerages to offer them lower fees. A retail investor is an individual who invests their own capital, typically at lower frequencies and volumes.
Unlike individual investors who buy stocks in publicly traded companies on the stock exchange, institutional investors purchase stock in hedge funds, pension funds, mutual funds, and insurance companies. They also make substantial investments in the companies, very often reaching millions in dollars in value.
Individual investors are individuals investing on their own behalf, and are also called retail investors. Institutional investors are large firms that invest money on behalf of others, and the group includes large organizations with professional analysts.
The GP has legal authority over the fund, sources the LPs who supply the capital, and makes the decisions about how to use that capital, including what operating companies are in the investment portfolio. As such, the GP is also known as the fund manager.
The key difference is that funds of funds invest in firms rather than specific companies or deals. Or, more accurately, they mostly invest in firms rather than specific companies or deals. The fund of funds is an “extra layer” between a private equity firm and its normal set of Limited Partners.
Accredited investors, including individuals and institutions, have exclusive access to VC opportunities, requiring specific financial qualifications and investment expertise. Consider your investment goals and risk tolerance before investing in VC. Volatility, liquidity risks, and limited transparency are inherent.
The SEC allows them to accept up to 35 non-accredited investors over the life of the fund. But they will usually just stick to the accredited-investor guidelines; some set even higher net worth or earned-income levels minimums.
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