How retail investors can invest in private equity funds

If anyone is wondering why Elon Musk has such a fan club, it’s because his inner nerd is for those who appreciate immature geniuses. Look no further than his recent announcement that he could establish a university in Texas – the Texas Institute of Technology and Science. For most of the people who commented on this tweet, it was completely over their heads.

Credit: Twitter

After announcing its possible foray into the education sector, the Internet was in turmoil. Who will finance it? What subjects will they teach? Mr. Musk suggested that the word “science” should come first – Texas Institute of Science and Technology. “No, T is definitely the first one,” Musk said, as he spoke about the epic product that will undoubtedly be on display at TITS University. “Universally admired,” Mr. Musk said, and he’s certainly right about it.

Two things to take away from this. First, it is always important to never take yourself too seriously, even if you are the richest man in the world with a net worth of over $ 300 billion. Second, always pay attention to the details. Many don’t, and that’s why investment advisers make a lot of money. One of these companies is Franklin Templeton (BEN), one of 30 stocks we invest in as part of our dividend growth investment strategy.

Templeton’s alternative assets

One of the top performing stocks in our dividend growth portfolio was Franklin Templeton, a company we previously worried about because it didn’t seem like it had great leadership. This is no longer the case, as investors have rewarded the company for their recent decision to acquire a large private equity firm in order to continue their transition to alternative assets. Before we get into the thick of it, let’s talk about how Franklin Templeton makes money.

We all understand how fees work on a fund or ETF. The expense ratio is a fixed annual cost that the manager is paid, regardless of the performance of the asset. Franklin Templeton has about $ 1.53 trillion in asets youunder mmanagement (AT M). (To put that number into perspective, the world’s largest asset manager – Blackrock – has around $ 9 trillion in assets under management.) With revenues of $ 8.43 billion in 2021, Franklin charges around 55 basis points (0.55%) on their AUM, a number that rings about right.

Increasing AUMs increases income, but not all AUMs are created equal. Here is a breakdown of the asset classes that Franklin dabbles in.

Credit: Franklin Templeton

That part of the “alternatives” you see above just increased to $ 200 billion because Franklin bought a private equity firm called Lexington Partners. Here’s how it fits into the other alternative assets they hold.

Credit: Franklin Templeton

Over time, the amount of money Franklin invests in alternatives increases.

Credit: Franklin Templeton

And here’s why.

Credit: Franklin Templeton

The general trend in the market is for asset managers to think outside of traditional asset classes – stocks and bonds – and diversify into other areas such as alternatives like private equity. This made us think about our own asset allocation strategy.

Our asset allocation strategy

It all came to light by looking at how we allocated our own assets under management. About 8% is dedicated to alternative assets – gold, wine, art and bitcoin.

The assets managed by your MBAs – Credit: Nanalyze

The yellow bars seen above qualify as alternative asset classes, but perhaps not the most conservative to hold. Topping the list are real estate, hedge funds and private equity. But let’s be honest here. You’ll get a lot more detail by casually mentioning that you just bought Louis Roederer Cristal 2000 or the Yayoi Kusama coin you invested in, rather than talking about your investment in a secondary private equity fund from Lexington Partners.

At least when it comes to private equity, the problem resolves itself. Right now, we don’t think there is a viable way to invest in one of the top ten private equity funds. If you’re about to email us about companies like Moonfare or the like, put that digital pen down and listen to us first.

Invest in private equity funds

To simplify this conversation, let’s keep venture capital out of this conversation. Yes, it’s a form of private equity, but the type we’re talking about here would be funds managed by the best private equity firms in the world, names like these:

Credit: New capital management

Private equity funds have historically been reserved for institutional investors or very high net worth individuals. Lately, there has been a lot of talk about opening up this asset class to retail investors. The Germans in Zee are making this happen for Asian and European investors with a company called Moonfare.

Private Equity Gateway Platforms

First off, kudos to the Moonfare marketing team. You’re putting in some amazingly good content to guide investors. And you should very well be, considering how much you’re charging them. Of a Wealth Manager article who talks about platforms like Moonfare:

It’s important to note that the platforms charge a fee in addition to what investors would pay for the underlying funds, which are typically around 2% management fees and 20% performance fees.

Credit: Asset manager

Moonfare’s added value here is simply access to large private equity funds – which all charge their own fees – while providing liquidity. We are not investing the money we need anytime soon, so liquidity is not an issue for us. The problem is these huge fees. Why on earth is this company rewarded if another company is responsible for performance? We are not interested in charging more than 50 basis points to access a fund.

Private equity shares

There are publicly traded private equity firms like Brookfield Asset Management (BAM) and Blackstone (BX) which each have a market capitalization greater than $ 90 billion. But investing in companies that create and manage private equity funds is not the same as investing in the funds themselves. You will not benefit from the same diversification effect that you would obtain by investing in real funds, and you are not guaranteed to benefit from the same return as the underlying funds. (We have already discussed this in the context of publicly traded venture capital firms.)

Blockchain and securitization

In our recent article on Securitize, we talked about the huge opportunity to unlock private equity by giving it liquidity. Securitization could potentially offer investors of all types an inexpensive way to purchase private equity funds. We don’t know much about any plans Securitize might have, but it’s likely a direction they’ll take. What they will charge if they succeed remains to be seen.

There are also many other companies that are considering using blockchain to create new assets for retail investors. A recent Blockdata article compared nine different asset tokenization platforms, some of which surely seek to make private equity more accessible.

Credit: Blockdata

Other ways to invest in private equity funds

If there are other ways to invest in the best private equity funds that we haven’t talked about today, we would love to hear about them. We say “the best private equity funds” for a good reason, because these are the investment managers we want to trust our money with. So anyone who gives us access to a top tier fund should charge a reasonable fee for this privilege. Nothing of the sort 2 and 20 thing. Half a percentage point seems like a fair price given that they will likely have to invest in the fund first and then distribute access to retail investors.

Nothing fancy will come at this price and we are okay with that. We don’t expect to have cash because it’s just additional costs, and neither do we expect there to be a lot of choice. A few funds from several of the top ten private equity firms will do just fine. Since we would expect you to use the term ‘blockchain’ to raise funds for your business, we’ll assume you’ve secured everything properly, and the minimums can start at $ 10,000 so that we commoners can get it right. can dip our toes in the water. If this sounds like you, please drop us a note so that we can verify your offer.

Conclusion

It is important to take a holistic look at your own picture of asset class allocation. Ideally, you’ll want to have some of your money in alternative assets like real estate, hedge funds, or venture capital funds. Private equity may be banned at the moment, but it is an asset class to watch out for. A well-diversified asset portfolio will help you get a good night’s sleep and always give you something to get excited about, even in times of economic turmoil.

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