Easier Access to Information as a Way to Increase PE Allocation
At its core, investing is a process of carefully assessing – for each asset –the trade-offs between the possible upside of an investment, and the related risks carried. To assess such a trade-off, an investor deploys a process including due diligence aiming at obtaining a better understanding and quantification of these opportunities and risks.
In this context, analysis of available information is always a key enabler to investment. Conscious about this, governments and financial regulators have paid particular attention over the years to ensure that investors on the listed stock markets could access to regular and structured information through periodic reporting and filings. For public companies, therefore, investors can access a good level of information allowing them to make investment or divestment decisions. In spite of these regulations, some business models remain complex and financial reporting alone may not be sufficient to obtain a full picture of the underlying asset or company. Therefore, many investors tend to focus on the segments they know best, where they believe they can understand the risk/reward trade-off better or they know well already.
Investing in private companies brings therefore an additional challenge. Private companies usually do not disclose their financial or business information. When they do provide information, the available data is usually less codified and can be not as comprehensive, which, combined with the lack of liquidity of the underlying asset, and the discrete nature of the opportunities to invest in private companies, could be a significant deterrent to investment for some investors.
Private equity firms' strategy is to systematically scout the private markets for investment opportunities and deploy expertise and efforts to understand in depth the risk/reward trade-off of an investment. Therefore, investors in private equity-managed funds gain financial exposure to the private companies market by leveraging the analysis and due-diligence realized by the fund’s team. Nevertheless, for an individual investor, obtaining access to the Private Equity firms’ information, investment track record and portfolio companies is relatively difficult. Furthermore, most investors have little to no access to the top performing funds that tend to accept only very large investors.
This combination of difficult access to the best fund managers, lack of information and lack of liquidity is a deterrent for many individual investors. In the recently released BNP Paribas Wealth Management’s Global Entrepreneur Report Part II, focusing on Private Equity trends, nearly 2/5th of entrepreneurs indicated that lack of information is a key obstacle for them to increasing their allocation of wealth to the Private Equity asset class, with little difference between men and women (37% of men vs 38% of women).
Interestingly, female and male entrepreneurs have views about the asset class that are quite similar, but women tend to give more weight to the risks related to the fact that investment in Private Equity are illiquid (29% of women vs 20% of men), especially in an uncertain macro-economic environment (35% of vs 28%).
The entrepreneurs polled also provided interesting light on the view about the asset class in each region. In particular, while exposure to potential macro-economic risks was a general issue for the entire population, entrepreneurs from the Middle East had heightened concern about the topic (nearly 60% of them) than in other region (below 40%). The other major lights came from the fact that entrepreneurs from Europe and the USA were much more comfortable (only c. 20% or less were concerned about this) with an illiquid investment than in Asia or in the Middle East (c. 40%).
In that context, the role played by private banks to help their entrepreneurs clients access fund managers and understand the underlying risks of potential investments is a key differentiating factor. As such, entrepreneurs listed the diligences realized by their bank on Private Equity funds as one of the top mitigating factors in their assessment of the investment risk, alongside their own research.
Private Equity is an asset class that has attracted high share of the wealth invested by entrepreneurs. However, the lack of information is a major obstacle for them to increase their allocation. Gathering the right advice to assess the potential risks and rewards about an investment is part of any sound investment process, but in the field of Private Equity where information is scarce and access to the best funds is limited, the role of the best financial advisor is critical to assist and ensure a smooth investment. This is why BNP Paribas Wealth Management has established for decades a dedicated Private Investments team focused solely on offering this kind of investment to its clients and help them obtain detailed information and clarity on the funds they invest in and the assets they carry.