Growth equity "an easy concept to grasp" for clients

With an increasing number of alternative investments to choose from, several advisors agree that growth equity is currently the most popular private equity sub-strategy.

For one, it’s one of the easiest to understand, says Stoy Hall, founder and CEO of Black Mammoth.

“Fundamentally, investors understand that one the most,” he says. “They see this company doing well, I want to put more money in it to make money. It’s a very easy concept to grasp as compared to buyouts or secondaries.”

Additionally, Hall says society is at a point in time where clients have been sitting on cash for a long time as during the pandemic, “everyone hoarded cash.”

“With interest rates [right now], there's just not very many opportunities out there so where else would you start to go? You'd start to go to businesses and companies that are successful and put money into them.”

Zach Gering, managing director at Wealthspire, says an increasing number of investors wanted to own in private companies’ growth, citing Uber as an example.

“That's why there's such a big allocation to growth equity, because limited partners who invest in it want that,” he says. “They don't want boring cash flowing businesses; they want private businesses that they feel like have can grow exponentially.”

Growth equities, Gering highlighted, are part of a well-rounded allocation just like, in the public sense, clients may want to own Google or Home Depot as a value investment.

“If your portfolio is of the size that you can take on the illiquidity of private markets, because private markets are not for everybody, you want to have the ability to have a portion of your portfolio that is small, but in the high risk, high reward camp. That's what growth equity is and that’s why it’s gained in popularity,” Gering added.

Crystal Capital Partners released findings late last week that found growth equity is a standout among sub-strategy allocation trends. 23 percent of advisors said that more than 50 percent of their clients were allocated to the strategy.

Meanwhile, buyouts aren’t garnering much interest among clients as 70 percent of advisors surveyed said less than 10 percent of their clients are currently investing in the strategy in addition to 38 percent saying there is no interest among clients.

As for the types of sectors driving growth equity demand among clients, investments in technology leads the charge, followed by healthcare and energy.  

Because these are proven companies that are on a path to substantial scaling of their businesses, says Alan Strauss, senior partner at Crystal Capital, growth equity continues to be an attractive asset class.

“Now that you're seeing it, in a sense, be more democratized, it’s not as if growth equity as an asset class will go away. We think it’s part of an overall diversified portfolio of private markets,” Strauss said. “It's typically an allocation that may get weighted more heavily or reduced, but it's not something that goes away and out of the portfolio."

Growth equity not only has attractive performance characteristics but has also maintained a substantial historical performance that’s attractive based on the economic cycle in the current environment, Strauss says. As a result, he says, “it's the ability to bring the risk mitigating and the performance enhancing benefits that private markets have long had into high-net-worth portfolios.

“The challenge, really, for advisors and their investors is to find the right types of strategies and managers and be able to implement them within a portfolio,” Strauss added.

Those who are currently investing in growth equity typically have everything stabilized in their portfolio, Hall says.

“If they have their retirement under control, they're allocating more towards real estate, and everything is just sitting there, because they're ready for this next thing. They’re ready for some growth because their basis is solidified,” he says.

Because clients still have extra cash in their portfolio, Hall advises his clients to hold onto a little more cash until after the election.

“We’re going to go after these opportunities because there's going to be even more come 2025,” Hall said.

The reason for demand in growth equities – and private markets in particular, comes down to being “a cultural thing,” Gering says.

Because investors feel like there's more opportunities to grow a smaller amount of money into a larger pot, they want to buy the biggest and best companies. It’s in the private markets where they feel they can get companies who are more at an infancy point, Gering added.

“Companies are staying private for longer and so that's why I think there's an appetite growing for that too.”

Overall, while Gering thinks it can belong in all clients’ portfolios, “it has to balance with other asset classes too.”