Back to School: White paper touts benefits of PE for retail investors

A new white paper from asset manager Altegris called “The modernization of private equity, understanding and implementing private equity today,” shows how two firms are attempting to sell private equity to retail investors. 

Altegris has teamed with KKR on the Altegris KKR Commitments Fund, which accepts minimum investments of $25,000. The fund, which is being marketed by Merrill Lynch, is targeting up to $375 million for primary offerings and secondary acquisitions of interests in funds, according to a filing. Separate accounts specialist StepStone is a sub-advisor on the fund.

The white paper aims to provide more information on how to deploy money in private equity, since there are already plenty of primers out there on the asset class, said Lara Magnusen, who co-wrote the paper with Eric Bundonis. Both are portfolio managers at Altegris. “We wanted to focus on … how do you put it in your portfolio and what uses it has,” Magnusen said.

Bundonis and Magnusen make the case that private equity provides enhanced returns to public equities per dollar invested. Their first major point is that private equity is well established, with $2.6 trillion in assets under management and institutional investors allocating about 21 percent of their portfolio to the asset class.

The study also emphasized that investors may be rewarded with better returns than public equities, where individuals hold a big chunk of their money, partly because of the illiquidity premium offered by private equity.

“Forgoing frequent liquidity [available in public shares] can be rewarded with enhanced returns,” the white paper said. “This is a primary reason why investors should consider private equity.”

While the Altegris KKR Commitments Fund provides limited liquidity options after two years, the fund is intended to provide much longer-term returns.

To illustrate the long-term advange of private equity, a chart in the white paper shows the growth of an initial $1,000 investment between April 1986 and March 2015. Money put into the S&P 500 climbed to $16,859 during the time period, while the Cambridge U.S. Private Equity Index grew the same sum to $41,425.

“We expect this outperformance to continue as the illiquidity premium is likely to hold or even expand,” the study said. But it noted that private equity fund selection remains critical, with top-quartile funds outperforming bottom-quartile funds by an average of 14.4 percent per year.

The white paper suggests individuals should re-allocate some of their money aimed at public equities to private equity. A conservative approach would be to allocate 5 percent to private equity and 95 percent to stocks. An aggressive approach would be 30 percent private equity and 70 percent stocks.

Magnusen said the firm sees an appetite for retail investors wary of a looming bear market in stocks.

“After a bull run in the equity market, people know their returns will be lower than compared to the past five or six years,” she said. “Private equity is a great answer for these retail investors. It’s a good time to introduce it.”

Action Item: Read the Altegris white paper here:

Correction: This story was updated to fix a wrong first name for Lara Magnusen.