SMSF investors unsure about the use of private equity in their portfolio should regard it as a substitute for shares, but without the same exposure to market fluctuations from political and economic events.
Schroders Capital head of private markets business development Claire Smith said private equity investments had matured in recent years and become more mainstream, while at the same time seeking out small to medium companies that were on the rise.
“When we started talking private equity about five years ago, people were still putting it in an alternatives bucket and replacing hedge funds because hedge funds had not quite delivered the returns, especially during COVID,” Smith told smstrusteenews.
“Really it’s just an international equity exposure now and people just have a private equity allocation from a strategic asset allocation point of view.
“The advisers we speak to would have a private equity allocation and that’s become so mainstream now or might have private assets and private credit, but at its core it is an international equities exposure.”
Smith’s view is based on her experience working on the Schroder Specialist Private Equity Fund, which has been in operation since March 2020 and holds 270 companies across the world, with US$2.4 billion in funds under management invested in businesses worth $100 million to $1 billion.
She added most of these firms are considered to be small to mid cap that avoid macro trends and are instead tied to ‘mega-themes’, such as demographic change, digitalisation and decarbonisation, and as such most are immune to the impact of any tariff or trade pressures coming from the United States.
Despite this, she noted investors should avoid being overweight private equity.
“If you put it into a model optimisation tool, that will say put 100 per cent in private equity because it’s higher returning with a lower volatility, but what you need to then do is overlay the fact that it’s not daily liquidity and that’s where the restrictions come,” she suggested.
“When you think about an SMSF, it’s a long-term investment and if you’re in accumulation phase, private equity compounds and delivers returns throughout that period.
“If you are in retirement phase, you can use the quarterly liquidity feature to generate some income out of the fund, but you do need to be conscious that if there is market stress, these funds have the ability to close redemptions, so you need to have enough income or assets you can liquidate in other parts of the portfolio.
“At its core it is just a way to access companies around the world that are small to mid cap and where we see best relative value, and where you also get the best diversification from listed markets because companies that list are much bigger and have different macro influences around their performance.
“Whereas our companies are small in size and each one brings its own idiosyncratic risk, which is quite nice, especially in a world with a lot of volatility where you want smaller companies less influenced by tariffs.”
''