Advisers warned on private-equity liquidity and selection

At the Australian Wealth Management Summit in Sydney, three private-equity and venture-capital specialists addressed the key issues advisers face when adding this asset class to client portfolios.

Liquidity, Returns and Manager Selection

Eric Chan, managing director of Aura Group, said venture-capital funds are typically illiquid, but entrepreneurs value that illiquidity because building genuine enterprise value takes time. He explained that clients accept reduced liquidity in exchange for the potential of higher, compounding returns.

Chan added that, unlike public equities where many active managers underperform the index, private-equity and venture-capital lack benchmark indices. Consequently, the performance gap between top-quartile and lower-quartile managers can be exponential, making the choice of a skilled manager far more critical than in other asset classes.

Access and Market Share

Mark Richardson, GLG expert and chair of MarkoPolo, noted a shift toward evergreen structures that allow monthly or quarterly redemptions. He reported that Australia now hosts roughly 50-60 private-equity vehicles, with about 10 dedicated solely to pure private-equity strategies.

Richardson highlighted that the “democratisation” of private-equity enables individual investors and small family offices to commit as little as $10,000 or $100,000, a stark contrast to the traditional $5 million entry barrier.

He also pointed out that the four largest Australian superannuation funds hold about 60 % of the nation’s private-equity exposure. Overall, private-equity accounts for roughly 5 % of the $4.5 trillion in retirement savings, a figure that climbs to 10 % for the government’s Future Fund.

Investment Horizon and Volatility

James Duffy, investment director for private markets at Alvia Asset Partners, said: “For advisers, it’s important to size the investment correctly, most investors will have an expected time frame of five to six years but in reality, that should expect that go to to 10 and clients need to manage liquidity so that has to be sized appropriate. This liquidity can give a false sense of security around volatility. Just because they aren’t marked daily, doesn’t mean they aren’t volatile. If they were listed on public markets, I can guarantee they are just as volatile as listed equities are. So be mindful that even if an asset is marked as quarterly or six-monthly, they are volatile during that period.”