- Below we detail what private equity is, what benefits it offers, and how it can be optimized through securitization.
- The information is intended for asset managers looking to build comprehensive strategies by adding private capital for diversification.
- FlexFunds offers an asset securitization program to convert illiquid assets, such as private equity, into liquid assets. For more information, feel free to contact our experts.
When building a comprehensive investment portfolio, asset managers often closely consider adding private equity for the multiple benefits it offers.
However, the challenge is that it also entails a series of disadvantages. Fortunately, these can be solved through an asset securitization process.
What is private equity and why is it attractive?
Private equity refers to any ownership interest in a company that is not publicly traded. As the name suggests, its shares are private and not traded on the stock market.
While many companies start out as private and later decide to go public, others remain private indefinitely.
Private equity is highly attractive for managers because it allows them to offer their clients two major advantages:
Diversification
Private capital helps improve portfolio diversification. Since these assets are not traded on the stock market, they are less susceptible to broad downturns (systematic risk). As a result, in an unfavorable market environment, the portfolioâs overall performance would be less affected.
Higher returns
Private equity also helps achieve higher long-term returns. Typically, private companies are in early growth stages and operate in highly promising industries. Therefore, their potential for revaluation may be greater than that of publicly traded companies.
Because of these benefits, the global private equity market size is expected to grow from USD 541 billion in 2024 to nearly USD 1.35 trillion by 2034, implying a compound annual growth rate of 9.6%, according to Precedence Research.
Traditional challenges of private assets
As mentioned at the beginning, private assets are not free from drawbacks. In fact, they suffer from two that can be serious impediments without the right tools:
Illiquidity
Since they are not publicly traded on global exchanges, private equity is highly illiquid. In other words, it takes significant time and/or cost to convert the investment into liquid cash ready to be used.
If capital is required for another more attractive investment, or because the original acquisition rationale has changed, asset managers could face a major challenge.
Preferential access
On the other hand, most private equity is available only to institutional or qualified investors. Retail investors and some small managers and advisors may not be in a position to participate in these investments.
In this case, they would miss out on the diversification benefits and higher potential returns of private equity.
Securitization: The key to democratizing private assets
Thanks to technological advances and the development of the financial system, it is now possible to democratize private assets. How? Through asset securitization.
How securitization transforms illiquidity
Asset securitization is a process that converts illiquid assets into bankable assets with their own ISIN/CUSIP codes.
Carried out by companies such as FlexFunds, this process creates exchange-traded products (ETPs) in the form of structured notes, which are tied to and backed by the underlying asset portfolio.
Structured vehicles: Gateway to mass investment
Thanks to these structured financial vehicles, asset managers and advisors can reach a broader client base.
ETPs can be traded from a regular brokerage account and without the need to handle the large capital volumes required in conventional private equity.
Therefore, they are available to all types of investors, regardless of their wealth status or location.
Benefits of combining private equity and securitization
By securitizing private equity assets, asset managers can offer two important benefits:
Accessible diversification
As mentioned earlier, combining securitization with private equity allows for accessible portfolio diversification. Investors can participate in the growth of a private company without being a majority shareholder. It is enough to acquire an ETP linked to a private asset or portfolio of private assets.
More opportunities
In addition, securitization broadens the range of investment opportunities. Since private equity would be comparable in liquidity to public stocks, it becomes possible to build a more comprehensive portfolio without sacrificing the ability to convert assets into liquid cash.
Regulatory and operational challenges to consider
When securitizing private equity, asset managers must take into account certain regulatory and operational challenges:
Local laws
First, it is essential to have in-depth knowledge of local regulatory standards, since not all countries have the same laws and requirements regarding structured vehicles.
Complexity
In addition, it is important to remember that securitizing private equity is a complex task that requires a multidisciplinary team of specialists and significant operational support.
For this reason, it is ideal to have the support of specialized companies such as FlexFunds, which offers a turnkey solution.
To learn more about FlexFunds ETPs and our asset securitization program, feel free to contact our team of specialists. We will be glad to assist you!
Sources:
- https://investor.vanguard.com/wealth-management/private-equity
- https://www.moonfare.com/pe-masterclass/why-invest-in-pe
- https://www.precedenceresearch.com/private-equity-market
