"One of the best kept secrets in the investment world"

It's been a tough year if you're long on the equity market. But while public markets have seen significant falls, that's not necessarily true for private equity investors.
Hans Lee

Livewire Markets

Returns have held up through 2022 relative to listed markets, as has fundraising and deal activity. That makes the asset class, according to David Chan of MLC Global Private Equity, attractive in a diversified portfolio.

David has a point. Just think of all the major M&A moves that have been made in the last two years. As of writing, KKR's bid for Ramsay Health Care (ASX: RHC) is the largest in the Asia-Pacific region this year. In the startup space, Aussie VC giant Blackbird Ventures just closed its first billion-dollar fund. And earlier this year, US private equity whale Blackstone bought Crown Resorts for nearly $9 billion.

But as alluring as this all sounds, private equity can also be a minefield. For one, it's traditionally a very long-term asset class. It has also usually been a space only entertained by high net worth and seasoned investors. 

Until now, that is. 

In this, the first of a brand new series of Expert Insights, David sits down with me to discuss the democratisation of private equity. We'll discuss why retail investors may consider getting involved, go deeper into the health of valuations in today's market, and talk about one key risk you should know before dipping your toes into the water. 



EDITED TRANSCRIPT

LW: How would you summarise the private equity opportunity in one line?

David Chan: For me, private equity is one of the best-kept secrets in the investment world. It's generated some of the strongest risk-adjusted returns through the cycle, in my opinion. And yet historically it's really only been accessible by very high net worth investors and institutional investors. But now the market's opened up and retail investors can now access this growing and very important asset class. 

LW: Why should someone consider private equity when there are public options that are far more accessible?
David Chan:
For a long time, I think most Australians have really invested only in the listed markets and within that concentrated on a couple of big name banks and resource companies. But today, a lot of companies want to stay private longer. 

They don't want to have quarterly reporting cycles to the market, and there's such a growing pool of private equity capital available to support these businesses. 

LW: What is the single biggest risk investors should consider?
David Chan:
I think the biggest risk that people need to be aware of is that fundamentally it's an illiquid asset class. So historically, it was the realm of institutions that invested millions of dollars and locked up their capital for at least 10 years. 

Now with products like MLC's Global Private Equity Fund that we just launched for the retail market, investors with as little as $20,000 can invest and have limited monthly liquidity accessible and so it's opened up private equity to a whole new range of investors. 

But that said, it's not an asset class like public equities that you should be trading in and out of. It's more an asset class you want to be patient with your capital and invest regularly for the long term because we found that the best way to generate sustained and strong long-term returns is to be in the market, both for good times and bad.

LW: How have valuations been impacted in this environment?
David Chan:
There is some correlation to the public markets, and so while valuations have been affected at the margin, the outperformance of private equity really still has been there and we've seen it in our own portfolio where at MLC private equity has been one of the key sources of Alpha for the overall programme delivering over 18% returns on a 10-year basis. (As at the time of recording for the period ending 30 June 2022. The 10-year return to 30 September 2022 is 17.7% p.a.)*. 

Even in the last correction where we've seen public market companies and in many cases in tech and healthcare fall 50, 60, or 70%. Our programme has been very stable and has actually not lost capital over the last year.

LW: Are you concerned deals activity will continue to slow given the headwinds?
David Chan:
There's definitely a lot of both real risk and perceived risk in the market at this point, but I think that's actually a very healthy dynamic. And historically, as we analyse our own portfolio at MLC, we've seen these types of periods to be some of the best times to be investing to generate great long-term returns. 

And the reason is that while overall deal flow moderates, companies are more fairly priced and you suddenly see some higher quality companies come to market that may not have considered taking on private equity capital or selling in the past, but now they see those challenges ahead. 

They want really strong partners with deep operational expertise and other parts of their toolkit, which they can leverage to help these companies become market leaders, take over competitors, and really cement their leading market position over the coming cycle.


* Please note past performance information is not indicative of future performance.

Want to learn more?

MLC Asset Management has been managing global private equity for over 25 years and has recently launched the MLC Global Private Equity Fund. To find out more visit their website. 


........
MLC Asset Management Pty Ltd (MLCAM) (ABN 44 106 427 472, AFSL 308953) and MLC Investments Pty Limited (MLCI) (ABN 30 002 641 661 AFSL 23 07 05) (as the issuer of the MLC Global Private Equity Fund (Fund)) are part of the Insignia Financial group of companies (comprising Insignia Financial Holdings Ltd ABN 49 100 103 722 (formerly IOOF Holdings Ltd) and its related bodies corporate) (Insignia Financial Group). No member of the Insignia Financial Group guarantees or otherwise accepts any liability in respect of any financial product referred to in this communication or MLCAM’s services. Past performance information is not indicative of future performance. Returns are not guaranteed, and actual returns may vary from any past performance described in this communication. This information may constitute general financial advice. It has been prepared without taking into account individual objectives, financial situation or needs and because of that you should, before acting on the presentation, consider the appropriateness of the information having regard to your personal objectives, financial situation and needs. You should obtain independent financial, legal and taxation advice and consider all risks before investing. The Fund is available via a Product Disclosure Statement (PDS). You should obtain a PDS and Target Market Determination (TMD) for the Fund and consider it in deciding whether to acquire or continue to hold an interest in the Fund. A copy of the PDS and/or TMD is available upon request by phoning the Client Services team on 1300 738 355 or on our website at mlcam.com.au.

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Hans Lee
Senior Editor
Livewire Markets

Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".

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