Carl Jung once said, “… like vintage years of wine, we have the qualities of the year and of the season of which we are born.”
To produce a fine vintage wine, many variables must be managed. Weather conditions, geography, grape variety, age of the vines, soil quality and the winemaker’s skill responding to varying conditions, all contribute to the quality of the wine. The same can be said of private equity. Market conditions on a geopolitical, macro, local and sector level may impact the success of a fund from a particular vintage year, the year the fund begins investing. Of course, just like stocking your cellar with wine from critically acclaimed producers, investing with well‐regarded managers who have deep skills, resources and industry expertise may also play a critical role in determining performance.
Institutional investors have long looked to private equity as a potential source of attractive returns, low correlation to other asset classes, diversification from public securities and the possibility of returns greater than those otherwise available in the public markets. They establish annual asset allocation targets and invest with a diversified set of managers across strategies, sectors, geographies and vintage years.
Individuals, however, typically lack the capital, resources and relationships necessary to access, conduct due diligence on and manage a steady allocation to the asset class. As exposure to private equity is generally not available through mutual funds or separately managed accounts, and commitment requirements are typically $5 million to $20 million per fund, private clients are not able to follow the systematic institutional model of setting a long‐term allocation policy.
In recent years, “access fund” structures have enabled high-net-worth individuals to invest in private equity with substantially reduced minimum commitments on a one-off basis. More recently, individual investors have allocated to private equity through registered private equity funds‐of‐funds. This structure enables investors to participate in an actively managed portfolio of private equity funds at substantially reduced minimums. They may be structured specifically for individual investor and financial advisor ease of use.
For effective diversification, individual investors, like institutions, require regular and ongoing access to a series of private equity funds. A non‐systematic approach prevents private clients from enjoying the benefits of an appropriately constructed and diversified portfolio. Despite the importance of a thoughtfully developed allocation plan, very few platforms are equipped to provide access to elite private equity managers over multi‐year periods.
Private equity is a long‐term investment. Final results are often not known until substantial time has passed from the vintage year. For adequate diversification, a private equity portfolio should encompass a variety of vintage years, regions and strategies.
This is where financial advisors can add substantial value. Find a private equity platform that is committed to bringing quality new funds each year with minimum capital commitments sized to enable vintage year‐over‐year diversification and specifically designed to meet the portfolio construction needs of private clients. Select funds that both diversify client portfolios and complement existing investments.
So, will 2017 be a good vintage year? One can only speculate for both wine and private equity. Historically, private equity has thrived in times of market uncertainty and 2017 is shaping up to be a banner year of change.
Daniel Tauber is a Partner of Central Park Group, Central Park Group, was founded to serve the growing demand for alternative investments among high net worth and smaller institutional investors. The Firm sources private equity, hedge fund, real estate and fund‐of‐funds managers and develops offerings that are appropriate for a broad range of qualified investors. With experience across alternative investment asset classes, Central Park Group has established a platform of offerings to serve the needs of sophisticated investors in an increasingly complex investment environment.
Daniel Tauber is a partner at the Central Park Group, an independent investment advisory firm specializing in alternative investments for high-net-worth investors.
