Two years ago when asked in an interview on CNBC whether private equity was good for individual investors, Investure CEO Alice Handy said, “I understand why the industry would want to be in 401(K)s [but] it’s sort of crazy for the average investor.” She went on to point out that the illiquidity in private equity funds, where lockups can run as long as 10 years, high fees and lack of transparency and regulation.
Despite these limitations, private equity funds as an asset class have had double-digit gains for years. Large institutions, very wealthy investors and even public pension funds have invested in these products for years, reaping returns that aren’t seen in any other asset class except maybe venture capital funds.
Cambridge Associates’ U.S. Private Equity Index shows that while most major stock indexes were down 2% to 7% through the end of the third quarter 2015, the private equity index was up 5%, despite being slightly down that quarter. Its longer term gains were 14.3% for three years and 11.5% for 10 years compared to 12.4% and 6.8%, respectively for the S&P 500.
So when Fidelity announced in late April that its institutional division would expand its alternative investment platform to include private equity funds, it was a sign of the times. Private equity funds are now accessible to clients with a minimum of $100,000, according to Fidelity.
“We’ve heard from the advisors we work with that they were looking for an efficient and streamlined way to provide their clients with access to private equity products, says Gary Gallagher, senior vice president of investment products at Fidelity Institutional. “So expanding our platform to include those products was a natural progression and something that’s been in the works for over a year.”
The firm added this access through three intermediaries: iCapital Network, CAIS and Goldman Sachs Asset Management. Each brings with them an expertise of vetting and selecting investment managers, especially private equity managers.
CAIS, which uses Mercer to perform due diligence, applies its own “commercial overlay” to select from Mercer’s recommendations, says Matthew C. Brown, CAIS founder and CEO. He points out when asked about the risk of private equity to the public, “This isn’t Fidelity.com, this isn’t the retail business. Fidelity is expanding its institutional services, which is for professional advisors, people who are trained, licensed intermediaries. That’s an important distinction.”
But has the stellar performance of private equity over other funds in a tightening market masked some of the issues even advocates like Handy mentions, such as lockup risk, benchmarking and transparency?