Private equity funds, which buy and sell companies not listed on a stock exchange, are increasingly being marketed to individual investors. The pitches promote democratizing investing by giving the average investor access to exclusive deals, huge target returns, and a chance to “invest like an institution.”

Headline returns for these investments often look enticing, but research shows that those returns rarely reflect the actual economic experience of investors. For individual investors, the gap between perception and reality can be significant.

Tradeoffs to Consider

High Fees – Private Equity Funds often charge 2% fees on all assets plus an additional 20% of all profits. This introduces a significant hurdle that few private equity managers can overcome when compared to public equity investments. The funds we use to access public markets have an average fee of 0.2%. One-tenth the fee andno additional performance fee.

Misleading Returns – Internal rate of return (IRR) is commonly used to report private equity returns. However, IRR’s calculation depends heavily on the timing of cash flows to the investor. Private Equity firms can game these numbers by manipulating cash flows, making IRR return numbers not comparable to the return numbers you see from public markets. For example, the hypothetical return stream below has an IRR of 33% but an actual return on capital closer to 3%.

Investors should focus on the overall growth of their wealth, not return figures grounded in misleading return metrics.

Lack of Access/Liquidity – Private Equity funds typically have high investment minimums, long lockups, and capital call contracts that make it difficult for investors to allocate money to more than a handful of funds. This creates challenges in diversifying investments across the private equity industry, decreasing the likelihood of achieving reliable long-term investment outcomes. The lack of diversification turns investing in this asset class closer to gambling than a reliable long-term investment strategy.

An Evidence-Based Alternative

At Hill, we believe wealth is best built through broadly diversified, transparent, and low-cost portfolios that match your personal risk profile. Public markets offer exposure to the same economic engine as private equity – global economic growth and human innovation – without the high fees and illiquidity.

New research from Dimensional Fund Advisors puts the conclusion succinctly:

“Broadly diversified, transparent, and low-cost public market strategies provide investors with reliable access to global equity and credit risk premia – without the costs and opacity of private funds.”

We agree.

The Bottom Line

Private markets are often marketed as a path to superior returns, but the data tells a different story. Historically, once you adjust for fees, misleading returns, and illiquidity, private equity performance looks a lot like public stock market performance – just with more complexity and buzzwords.

The real question here is not whether private equity occasionally succeeds – it does. It’s whether it offers long-term, risk-adjusted, after-fee advantages over public markets.

The evidence suggests: not really.

Performance Disclosure (Hypothetical)
Hypothetical or model performance results, when presented, do not represent actual client performance. Hypothetical results do not reflect the impact of material economic or market factors that would have affected an adviser’s decision-making if managing actual assets. Hypothetical results are for illustrative purposes only and should not be interpreted as guarantees of future performance. Actual client results may differ.

Charts
Charts, graphs, formulas, probability visuals, and other illustrations included in this publication are intended to demonstrate concepts and provide context. They are not intended to be used alone to determine which securities to buy or sell, or when to buy or sell them. These illustrations provide limited information and should not be relied upon as the sole basis for any investment decision.

Does the following quote sound familiar? Does it sound like a Hill team member? Something from one of these Monthly Journals over the last 20 years? It should, because it’s the foundation of what our clients and we believe about long-term investing success. Not surprisingly, it comes from David Booth, one of the Co-Founders of Dimensional.

Over the years, I’ve had the privilege of meeting and hearing David speak on several occasions. He is a brilliant man who often sounds like a finance professor getting into the esoteric details of high-level math. You’d expect that of a University of Chicago (Booth School of Business…yes, as in David) Ph.D.

And that’s why I absolutely love this piece. David leaves academia behind and speaks from the heart about his investing experience in plain English that a grade-schooler will understand. Yes. A rare thing. It’s an ode to why all people should consider investing in the market, no matter your age or your net worth. And it’s brilliant.

Enjoy and be inspired to introduce someone you love and care about to the world of investing by starting here.

Of course, the Hill team stands ready to help share the power of long-term, evidence-based investing, too. Set up a time to talk here.

Hill Investment Group Partners, LLC (HIG) is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information in this publication is for educational and informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any specific securities, investments, or investment strategies. Nothing contained herein should be construed as individualized investment, tax, or financial advice. Always consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed.

Investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Future returns may differ significantly from past returns due to market and economic conditions, among other factors.

Our clients know we support them and their families in meaningful ways. This includes articulating long-term investment plans, helping refine estate strategies, and thinking creatively about charitable giving.

While mission statements are common in businesses and nonprofits, they’re far less common in family life. Yet as families become more complex, people live longer, and communication becomes more open, many are taking the long view and creating multi-generational plans that reflect not just what they want to happen with their wealth, but why. A family mission statement can bring clarity, connection, and shared purpose, often helping to avoid conflict now and in the future.

A recent Wall Street Journal article shares examples and great stories about how a family mission statement may make sense for your family. In the words of James Harold Webb, a serial entrepreneur quoted in the article and the patriarch of a 16-person blended family,

“Life is a gift that cannot be wasted. Family is the essence of that life and, as a family, we will work hard. We will play hard. We will live in the pursuit of knowledge. We will love our family unconditionally. We will give more than we take to ensure a better world.”

With the holidays approaching and families gathering, it’s a natural time to raise the topic. If this sounds appealing to you, and you’d like our help in preparing for that discussion or have us involved with future discussions, we’d love to help. Please reach out to me at buddy@hillinvestmentgroup.com or directly to your advisor.

Celebrate and make the most of this time together!