Cameron Brownjohn
As the cost of living crisis continues to impact Australian households, an increasing number of investors and their advisers are turning to private equity as a means to enhance their investment portfolios.
Cameron Brownjohn, founder and CEO of Federation Asset Management, says there are three reasons behind this.
“With the cost of living crisis weighing heavily on many Australians, we are seeing a significant shift in investment strategies,” said Brownjohn. “Private equity is becoming an attractive option for many investors due to its potential for wealth creation, liquidity, and diversification.”
Private equity refers to equity investments in privately held companies, unlike public or listed equities, which are investments in companies with shares that are readily tradeable on public exchanges. These investments range from high-profile privatisations of listed companies to investments in high-growth small-to-mid market enterprises and venture capital investments nurturing early-stage companies.
“Private equity investments are rarely passive,” Brownjohn explained. “Most commonly, private equity investors actively seek to improve the underlying value of their investments. This active involvement is a key differentiator from investors who focus solely on listed market opportunities.”
“Investors are drawn to private equity for three main reasons,” he says.
“Wealth creation: There is a range of data demonstrating that private equity investments consistently outperform listed equity investments,” noted Brownjohn. According to the Australian Investment Council’s Funding the Future 2023 report, Australia’s private capital industry achieved an average return of 18% over the past ten years, significantly outpacing the ASX200. “At this rate, every $1 invested in an average private equity investment ten years ago is worth over $5 today, compared to about $2 if invested in ASX200 stocks.”
“Liquidity: A range of private equity firms, including KKR, Partners Group, and Federation Asset Management, now offer the ability for Australian households to enter and exit their funds on a monthly or quarterly basis, subject to certain restrictions. “This newfound liquidity is an exciting development for Australian investors,” said Brownjohn. “It enables non-institutional investors to benefit from private equity’s wealth creation potential while preserving access to their capital.”
“Diversification: Even the most sceptical investors recognise the benefits of diversification,” Brownjohn stated. The Future Fund, Australia’s closest equivalent to a sovereign wealth fund, has roughly two-thirds of its portfolio invested in unlisted assets like private equity. Yet, many Australian households allocate only 0-5% of their portfolios to private equity. Given the potential for greater wealth generation and the availability of liquidity, more investors are questioning why their portfolios are so heavily weighted towards listed equities and away from private equity.”
The increasing demand for private equity products reflects a broader trend among Australian investors seeking higher returns.
“As more investors recognise the benefits of private equity, we expect this trend to continue,” said Brownjohn.