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| Private Equity |
Wisdom & Fair Warning
Laurence Neville
04/01/2004
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Coming to grips with liquidity
risk is trickier—and may prove to be a barrier to some of our private equity
ambitions. Advisors suggest we consider our liquid assets, liquidity needs and
age before jumping in. “Only when a client reaches a threshold of $5 million to
$10 million should he consider private equity investment,” says Robert Morgan,
senior vice president and director of private equity at Northern Trust Global
Advisors in Chicago. Evan Roth, partner at BBR Partners in New York, adds: “Be
aware of your time horizon. Private equity is not suitable for the old or the
young, who might have short-term liquidity needs.”
Patricia Stewart, managing director of JP Morgan Private Bank in New York, says
that while there is a need to acknowledge portfolio concentration risk, one of
the rationales of investing in private equity is that we are making a more concentrated bet on small companies. “From a return maximization perspective,
there is a need to concentrate on where the best opportunities are,” she says. |
Another crucial
consideration is how a specific private equity investment will sit alongside our
other assets. If this investment diversifies our portfolios, it will reduce our
overall risk. If a private equity investment, on the other hand, results in
a large concentration of exposure to a particular asset class, sector or
investment style, we will have increased our portfolio-wide risk level by
decreasing our diversification.
We must also be aware of our existing private
equity exposures, which might not be immediately apparent. Roth warns that we
may have a high exposure to private equity through ownership of our own
companies. Michael Schweitzer, managing director and co-head of private wealth
services at UBS Financial Services in New York, agrees: “We deal with a great
number of clients who are entrepreneurs. [Clients] will hold significant
positions in their companies, and it is important for us to include such assets
in our asset allocation work.”
Awash in Illiquidity
Private equity is a very long-term and illiquid
asset: It has a long-negotiated investment process, a long hold period, and a
long sale process, making exits from a fund difficult for investors. “While a
secondary market is developing for private equity fund investments, investors
may have to accept a large discount if they want to exit,” says Northern Trust’s
Morgan.
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