What's the most popular private equity sub-strategy, according to advisors?

Interest in private markets is trending higher and while private equity is one of its best known components, investors favor some strategies for investing in PE over others.

New research conducted among financial advisors using the Crystal Capital Partners platform found that clients are particularly interested in more mature companies undergoing transformation or expansion.

Although the overall share of clients that are investing in private equity strategies is low, around a quarter of advisors said that half of their clients are focused on growth equity along with 38% of clients who are very interested in doing so and 7% who are extremely interested.

Buyouts, on the other hand, are not piquing the interest of most clients with 70% of advisors revealing that less than 10% of their clients are currently investing in the strategy and 38% saying there is no interest among clients to do so.

"There’s clearly increasing demand from financial advisors for private markets,” noted Steven Brod, senior partner, CEO, and chief investment officer of Crystal Capital Partners. “Private equity is traditionally associated with buyout investing, and so it is interesting to note that financial advisors are reporting their clients actually have a preference for growth equity strategies, with their higher risk-return profile.”

Secondaries and venture capital are also well below the level of interest seen for growth equity with 21% and 16% of clients interested in these strategies, respectively.

EDUCATION GAP

Understanding of private equity sub-strategies is a clear barrier for clients with 27% of advisors saying that their clients do not understand the differences between them and 42% stating that lack of understanding or knowledge was a primary barrier to demand, along with illiquidity concerns (75%), perceived higher risk (50%), and high investment minimums (22%).

“This underscores not only the importance of providing advisors with educational materials that they can use with their clients, but also the requirement for advisors to work with trusted third parties who can help them due diligence the top funds and create private equity portfolios that complement their clients’ traditional assets,” added Brod.

The survey also looked at the industry sectors that are of most interest to clients. Tracking demand seen in public equities, technology (83%), healthcare (66%), and energy (29%) lead the way, followed by financial services (15%) and consumer goods (10%).

Interest is driven by high risk-adjusted returns (64%), diversification benefits (62%), the longer-term investment horizon (48%), and access to innovative companies (40%), while allocations are fueled by the track record of the fund/manager (49%), fees and expenses (42%), and alignment of interests such as co-investment by managers (29%).