Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 451

Private equity’s role in a well-constructed portfolio

The $200 billion Future Fund is not alone in its enthusiasm for private market investments. One of the most significant financial trends since the turn of the century has been the explosive growth in private markets.

Private Equity is the cornerstone of the Future Fund’s illiquid portfolio, accounting for 16.8% of total portfolio allocations, second in size only to their global listed equities portfolio (including both developed and emerging markets).

Meanwhile, Calpers, Americas largest public pension fund, has announced an intention to increase exposure to private equity and private debt from 8% to 18% as we see the acceleration of a well-established trend: Morgan Stanley says US companies (the largest market for private investments) have raised more money in private markets than in public markets each year since 2009.

The magnitude of the ongoing opportunity is still emerging, as private markets are significantly larger than public markets, according to the S&P Capital IQ database.

Companies with revenues = US$15 million

Understanding Private Equity

Private equity refers to capital invested in companies that are not listed on public exchanges. Such investments can be made at any stage during the corporate life cycle.

The characteristics, risk, and potential return of private equity investments typically vary according to the stage at which the investment is made, with most investments being made once companies are more mature and validated:

Angel Investing is initial private funding support often backing little more than an idea and an entrepreneur.

Venture Capital is where managers actively work with early-stage or start-up investments to develop the business to raise further capital to fund commercialisation.

Growth Capital generally follows the venture capital stages as companies with viable business models and proven demand prepare for success on a larger scale. An increasing portion of growth capital funds customer acquisition.

Buyouts are the largest private equity segment. Transactions involve buying all, or a controlling stake, of a mature company with intention to improve its business and financial health, later reselling it for a profit to an interested party or conducting an IPO. Such transactions are often called leveraged buyouts as predictable future cashflows are ‘leveraged’ such that the acquisition can largely be debt financed, thereby bolstering investor returns.

Distressed funding is niche and generally involves acquiring the debt, equity or assets of a distressed business with the intention to restructure, recapitalise, and return to profitability.

Most private equity funds have an investment term of 10-12 years with only a small portion of the committed capital generally required upfront. The investments are typically made during the first five years with the realisations occurring later in the life of the fund.

What’s in it for investors?

Since the GFC, more companies have chosen to stay private rather than list on public exchanges as the regulatory burden for listed companies has become increasingly onerous and the funding options for unlisted businesses have improved.

Investors are attracted to private equity for:

  1. Proven ability to deliver strong risk-adjusted returns
  2. Resilience displayed during market turmoil

Private equity’s lower correlation with listed equities has become more relevant as investors seek to diversify away from heightened valuations in global equities, and anaemic cash returns.

The charts below illustrate how private equity has outperformed listed equity across time horizons and geographic regions. There is also greater variation in performance among managers when compared with listed equity funds, meaning investors who commit to top-tier private equity managers can expect to capture much greater levels of outperformance than the averaged-out returns displayed below.

1 The Public Market Equivalent (“PME”) concept allows investors to compare the performance of private equity and other private markets investments (Private Equity) to other types of investments, such as public market indices (Public Equity). The methodology assumes buying and selling a given index according to the timing and size of the cash flows between the investor and the private investment. Performing this comparison requires the construction of a hypothetical investment fund that mimics private equity cash flows. This hypothetical fund purchases and sells shares of the index at the same time the private equity vehicle calls and distributes cash.

Sources: MSCI, S&P and BURGISS

Overcoming the challenges of Private Equity investing

The benefits of investing in private equity have traditionally accrued to institutional, wholesale, and ultra-high net worth investors who are better placed to manage the traditional complexities associated with investments in the asset class.

This changed in 2019, when Pengana Capital Group listed the Pengana Private Equity Trust (ASX:PE1), a listed private equity vehicle specifically designed to enable everyday retail investors to overcome the many barriers in accessing private equity.

The LIC structure is most appropriate for listed private equity because it allows an investment manager to unitise illiquid underlying investments into shares and list on the market. This structure solves several challenges of private equity investing, including:

High barriers to entry: Private equity fundraisings are extremely exclusive with significant excess demand for top managers; PE1 partnered with US-based GCM Grosvenor to leverage existing access via a well-established private equity manager with long-standing relationships, which provides exposure to these difficult-to-access private equity opportunities.

Capital constraints and high minimum investment requirements: Typical private equity funds may require a minimum of $5-10 million for a single investment. PE1 provides access to a truly diversified portfolio of private equity investments across underlying investment managers, economic conditions, vintages, geographies, sectors, and strategies (PE1 has exposure to nearly 400 underlying companies).

Highly illiquid: Existing private equity vehicles lack liquidity with an average 10-year capital lock up. But the LIC structure means PE1 investors have daily liquidity on the ASX.

Complex cash-flow management: Traditional private equity funds require capital to be contributed on a drawdown basis and exhibit lumpy returns as investments are realised and funds wound up. Yet the listed investment trust structure allows for internally managed cashflows, with drawdowns and distributions managed by the portfolio manager. Distributions are further reinvested to gain new private equity exposures.

No regular distributions: Regular distributions are a challenge for traditional unlisted private equity, yet PE1 can target a 4% p.a. distribution paid semi-annually.

Why private equity is becoming more relevant

In its Global Private Equity Report 2021, Bain and Company shows that one of private equity’s enduring strengths is its ability to thrive during periods of economic disruption with downturns historically providing excellent investment opportunities. This is particularly evident when assessing the returns (IRRs in the 17 – 21% range) of funds established in 2002 and 2009 following the last economic downturns.


All current evidence indicates inflation is likely to remain elevated, with potential for huge spikes following Putin’s invasion of Ukraine. Global interest rates could march steadily higher. This will put pressure on businesses with excessive leverage and valuations.

In the private markets, these characteristics are typically associated with the very large funds and mega transactions where the deal terms reflect the intense competition to deploy vast amounts of capital. Middle market transactions are typically completed with lower levels of leverage, and at lower valuations, which should provide a measure of additional protection in a rising rate environment.

The recent inflation shock presents a unique opportunity for private equity managers to offer solutions to high quality businesses that require continued financing and structuring them to include strong downside protection for investors while preserving meaningful upside.


Russel Pillemer is co-founder and Chief Executive Officer of Pengana Capital Group, which operates the Pengana Private Equity Trust (ASX: PE1). This article is general information and does not consider the circumstances of any investor.



Five tips for better startup investing

Being Jon Medved: three decades of start-up investing

How to invest in early-stage tech businesses


Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.


Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.


Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.