2 minute read
MODERN FINANCE D Is For Democratization
MODERN FINANCE D Is For Democratization
By Philip Dudley
“Hey, what about me?”
Anyone ever said that? For individuals, the alternative space in private equity has historically been hard to access for a variety of reasons related to net worth, suitability and liquidity.
Additionally, the operational complexity, complicated structures, uncertainty of cash flows and high investment minimums have been set with a high bar.
But these days, things are different with the democratization of private equity as the asset class continues to attract assets in the pursuit of diversification and higher historical returns than those achieved in the public markets.
The key innovation in the democratization of private equity has been the development of interval or open-ended funds that allow an investor to make purchases into an established diversified pool of assets at fair value.
Aside from buying into these funds at net asset value, additional flexibility exists in the form of an investor being able to add or withdraw capital in regular intervals. These features combined create a flexible and simple approach to private equity investing.
Now that we’ve established the benefits of accessing the space, the next step, and equally as important, is who you place your money with.
Number one, the manager of the open-ended fund should offer the same institutional quality portfolio as their “draw down” funds.
Number two, the opportunity set of investments should be large and broad so that the manager can maintain exposure while managing inflows and outflows. All the while, they need to be deploying capital into new investment opportunities which could include co-investments, secondaries, or asset based lending.
If that all sounds complex, and it is, expertise in both liquid and private assets is paramount.
The private equity asset class is obviously not without risk. But what are the risks to democratization? Well, they remain the same, and that’s the illiquid nature of the underlying assets.
Fund managers don’t suddenly make illiquid assets “liquid” by simply placing the assets in an open-ended interval fund. They have a liquidity portfolio in place to meet redemptions, but if these exceed available liquidity, the manager may limit redemptions which is usually 5% of net asset value.
This approach actually protects other investors because the fund would not be a forced seller. Rather, it could wait for a realization to satisfy any future redemptions.
And so, if you were ever wondering…democratization rules the day!
