The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Gaining Exposure to Private Equity

Most sophisticated asset allocation strategies for wealthy families will include an exposure to private equity. As noted above, the challenge is to create a durable program, gain access to managers that have a history of outperformance, and structure a portfolio that is well diversified across vintage years, geography, and the various stages of company maturity. There is also a challenge associated with reaching the target allocation, given the nature of the investment pattern.

Suppose that your asset allocation calls for a PE exposure equal to 20 percent of the overall portfolio, and that your portfolio totals $100 million. What is the best way to build the PE portfolio, given that the best PE firms require minimum investments of $5 million or more?

Your $20 million allocation to PE will be drawn down over a period of four to seven years and in year three or four the funds will begin to repatriate capital to you. In order to achieve vintage year and style diversification, you will need to make annual commitments of no more than $5 million, spread around among various stages of venture and different styles of buyouts. At most, you can commit about $1 million to any one partnership. But the best firms require $5 million.

For most families, the solution will be to structure a program around one or more funds of funds, committing to investing with each fund over a period of years to achieve the targeted diversification.