Published Sat, 09 Nov 2019 06:45:00 -0500 on Seeking Alpha
Co-Produced with The Belgian Dentist
When I first started managing portfolios at a multi-family office, we had a large exposure to private equity and heightened interest from the board of directors to increase that allocation. Unfortunately, it's not that easy to put money to work in private equity funds. For one, they don't necessarily raise capital all the time – at some point, they close a fund to focus on investments – and not all funds looking to raise capital warrant an allocation.
The proper asset allocation approach, I learned, was to target 30% more than you intend on allocating to your portfolio and to divide that number by 7-8 with the intention of investing that much every year. You see, if you target 20% allocation to private equity you could commit that 20% in any given year, but besides the risk of concentration, that capital won't all be called at once, so there is a good chance you will start receiving money back from the fund before you reach the 20% target. There's also the risk that an attractive fund isn't raising capital when you happen to be getting capital back from some of your previous investments. As a general rule, you're likely to only have 70% of your allocation invested at any point in time. So if you want to invest 20%, you should be committing closer to 26% to 27% of your portfolio.
In recent years, however, some private equity firms have raised capital in the public markets by issuing stock. The expected return profile an... Read more