Investment firms, which traditionally have targeted institutional and high-net-worth investors willing to pluck down $25 million or more on risky private equity investments, are now raising money from individual investors, The Wall Street Journal reports.
Lehman Brothers recently offered such a fund, with a $250,000 minimum, raising $650 million. Morgan Stanley did so as well, with a minimum of $500,000, for a fund that specializes in corporate buyouts in North America and Europe. And PowerShares Capital Management last month launched an exchange-traded fund that invests in companies that, in turn, invest in private equity firms.
“Individual investors are seeing how the large university endowments and pension plans and family offices have really increased their returns through the use of private equity and are trying to do whatever they can” to share in those kinds of returns, said Chris Cordaro, CIO at RegentAtlantic Capital.
In the 10 years ended through June, private equity has returned an average of 11.4% a year, compared to the S&P 500 Index’s average of 6.6%, according to Thomson Financial and the National Venture Capital Association. It’s no wonder, then, that private equity funds-of-funds have raised $10.9 billion in the first nine months of this year, according to Thomson data.
But financial advisers caution investors against placing too much money in such types of investments. As the playing field has become more crowded, as with hedge funds, there are more managers chasing returns. Such funds also may tie up an investor’s money for 10 years or longer, and since such funds are relatively new, they don’t have track records by which to gauge them. Finally, such funds charge hefty fees, and if constructed as a fund-of-fund, can really eat into profits; the overlaying fund may charge 1% of assets and 5% of profits, with the underlying fund, perhaps, levying a 1.5% fee on assets and 20% on profits.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.