Private Equity: A Growing Asset Class Offering High Returns And Diversification

Public markets have been and will continue to be, a core component of any investors portfolio. However, in the past two decades, there has been a structure trend in the rise of private markets, as investors search for higher returns and portfolio diversification. Private Equity, or investing in private companies and assets, is a proven asset class with a long history of outperforming public markets. This difference becomes larger at longer investment periods. [1] (See Figure 1).

Figure 1: Performance of Private vs Public Equities over 20 Years

In addition, Private equity has also been shown to enhance portfolio diversification and reducing risk. Starting with a traditional portfolio of 70% Stock and 30% bonds, increasing PE allocations allows investors to increase risk-adjusted returns while reducing risks.[2] (See Figure 2).

Figure 2: Risk and Return of Bonds/Stocks/PE Portfolio

Despite its allures, private equity has been dominated by institutional investors and ultra high-network individuals. For the vast majority of investors, access to PE is next to impossible, as most opportunities typically require long holding periods of >5 years[3] and large investment sums in excess of US$5 million.

1exchange: A Better Way to Invest in Private Equity

This is where 1exchange (“1X”) comes in. As Singapore’s first and only regulated and licensed private securities exchange, 1X serves as investors’ ideal gateway to private equity. Companies do a “private listing” on 1X, where a portion (~10%) of their shares are fractionalized and made tradeable amongst 1X’s investor community. By doing a 1X private listing, more investors, including individuals and family offices, can now partake in private equity investment opportunities at smaller ticket sizes, with the option of continuously trading and adjust their portfolio any time. This provides them greater and easier access to private equity while addressing some of its traditional risks of this that this asset class.

The Monetary Authority of Singapore’s (“MAS”) also firmly believes and supports the growth of the private market ecosystem. In a keynote speech, MAS Managing director Ravi Menon acknowledges that “Allocating investments in private markets is becoming more common and necessary, in order to create a well-diversified portfolio aiming for decent returns”. However, in the pursuit of good financial returns, the key for investors would be to identify private market opportunities, while minimizing risk. In order to achieve this, MAS has put in place several key initiates and streamlined regulatory processes. Besides supporting 1X as a regulated marketplace for tradeable private equities, MAS has also committed to allocate USD 5 bn of its own funds to invest in the private markets’ asset class.

Next Steps: Private Equity in the future of Investing

On 10 July 2019, we celebrated a momentous occasion as Aggregate Asset Management (“AAM”) became the first private company to be listed on 1X. 1X is extremely honoured to play a part in the future of Singapore’s investment scene. With ardent support from MAS alongside our proprietary online platform, investors will be able to have greater access to private equities, thereby expediting the growth of private markets.

[1] “Investing in Private Equity.” Essentials for Achieving Enhanced Private Equity Returns, JPMorgan Asset Management , Feb. 2018, am.jpmorgan.com/blobcontent/1383531120699/83456/PI_PE_INVESTING.pdf.

[2] Tutrone, Anthony D. “Private Equity and Your Portfolio.” Neuberger Berman, Neuberger Berman, 15 Feb. 2019, www.nb.com/pages/public/global/insights/investment-quarterly-asset-matters-private-equity-and-your-portfolio.aspx.

[3] Lee, Kyle. “The Emergence of Long-Term Capital in Private Equity.” The Advent of Long-Term Investing in Private Equity, INSEAD, June 2018, www.insead.edu/sites/default/files/assets/dept/centres/gpei/docs/insead-isp-the-emergence-of-long-term-capital-in-private-equity-jun-2018.pdf