The notion of private equity, what it is and how it should be viewed within the context of a broader portfolio can be a confusing topic for many investors. With the PE space growing rapidly, it’s a good time for the ETF Think Tank to talk with Jeff Knupp, the President of DSC Quantitative Group. His company provides quantitative alternative investment solutions and creates a portfolio of benchmark and investable indices seeking to track the gross performance of both the U.S. private equity and venture capital industries.
The first question posed was what exactly is the difference between private equity and venture capital. The two terms are often used interchangeably, but are there unique characteristics of each? Knupp clarifies that private equity usually targets more established businesses. Sometimes, they are simply growing quickly and need the capital to continue operations. Some are in need of help. Venture capital involves much younger companies. In many cases, they have ambitious ideas, but are still very early in the life cycle.
The discussion then turned to the state of the PE/VC market in general. Knupp states that while the COVID pandemic created a bit of a quiet period in the market, 2021 is expected to be a record breaking year. There is approximately a $3.8 trillion market cap in private equity and $2 trillion in venture capital with a lot of “dry powder” currently on the sidelines. Whereas pure play IPOs used to be the traditional exit strategy for these companies, SPACs are becoming more and more commonplace. He also notes that he expects the number of companies going back and forth between private and public to increase over time.
There is a perception that private equity generally leads to big returns. While this can certainly be the case, Knupp says that there are a lot of overexcited expectations. There are illiquidity and risk premiums that are at play, but a lot of companies never make it out of the private equity or venture capital stages. His company, DSC, looks to create tracking indexes to help manage these return expectations by being able to assess risk metrics during different market environments. Among the biggest risks are having your money tied up for many years without immediate access, high fees for active management, high degrees of leverage and a lack of price discovery.
Will rising interest rates have an impact on the private equity and venture capital markets? Possibly, but they will likely only have a modest impact. Whereas rate movements can have a more direct effect on traditional asset classes, such as banks, REITs and Treasuries, private equity is more impacted in terms of how it affects borrowing costs.
What does Knupp think you should prepare yourself for if you ever choose to invest in private equity? Keep your eyes wide open. There is a lot of risk in this space that may not be fully appreciated, but there are advantages outside of just return potential. The number of publicly-traded companies have halved over time, so you’re potentially lacking exposure to a large chunk of the market. Fintech has been an incredible area of the private equity market lately and companies offering marketplaces where you access services, such as AirBnB, have become incredibly interesting. There is a general consensus that more capital will keep flowing into these markets, which means both market cap and new investment should continue to grow.
This week we have special Get Think Tanked happy hour – a preview of the crypto debate that will take place at the etf.com awards. Come join us! As always, bring your questions.
The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).