1. It’s less volatile than public equities
Why should an investor want to invest in the Nicola Private Equity Limited Partnership? One reason could be that it tends to be less volatile than public equities – valuations aren’t driven by daily or hourly changes in market sentiment. Because their shares rarely change hands, private companies are valued more on business fundamentals— which means less short-term swings and returns more tied to business fundamentals.
“It almost doesn’t matter how the stock market does today or in the short-term,” explains Nicola Wealth portfolio manager Kazuki Nohdomi –these are long-term investments, so we have the luxury of selling when it’s the best time to sell. In the public markets, your investments’ performance particularly in the shorter term may largely be out of your control and driven by valuation multiples as opposed to fundamentals like earnings trends. But with private equity, as long as the companies you hold grow sales –either through volumes and/or price; manage their expenses and thus grow earnings, the value of your investments should naturally grow.
2. Shareholders have significant influence over how companies are managed
Indeed, as owners –typically with control stakes, of private companies, we have significant influence over just who is managing the company and how. This is not true in the public markets where retail investors have almost no say in company strategy. By contrast, we invest alongside general partners that are experts in certain industries and can help a company grow to the next level. This is the second reason to invest in private equity: much better alignment between the interests of shareholders and management.
3. Private Equity has a history of outperforming all other major asset classes over the long term.
The third important reason is that private equity as an asset class has a history of outperforming all other major asset classes over the long term. In the past 5 years, while the TSX has returned 10% and the S&P 500 returned 17% (USD), the PE asset class according to Preqin returned 21% (USD) to 9/30/2021).
Despite these advantages, private equity is inaccessible to most investors. To invest directly with a PE fund, you typically have to have $10 million to invest and be prepared to commit the money for seven to 12 years. You’ll then usually be charged 2% per year on funds committed (even though not all of it may be deployed) and a 20% performance fee on any return.
Most PE funds are “blind pools” designed to raise funds first and find investments later, Nohdomi says, so “you have no idea what you’re going to get.”
“You hope that the manager sticks with the plan and buys what they said they would, but you don’t know,” he adds. “You have no say in how quickly your money gets deployed. You have no say in when you get your money back.”
The Nicola Private Equity Limited Partnership, by contrast, makes it relatively easy. There’s no minimum investment, and thanks to our evergreen fund structure, you can withdraw from the fund with six months’ notice if necessary. As soon as you invest with the Nicola Wealth Private Equity Limited Partnership, the money is put to work right away, in a diversified portfolio of companies at all stages of maturity, from recent acquisitions to more mature investments that are ready to sell to another company or PE manager or be taken public.
The mentality for participating in the private market remains a long-term hold. “You don’t trade opportunistically by any means,” Nohdomi says. But if you’re looking to diversify your portfolio while curbing volatility and capturing strong long-term returns, our fund and Private Equity may be worth a look.
In the third and final post in this series, we’ll examine why the Nicola Private Equity Limited Partnership may be a good way to deal with today’s market volatility.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.