The Case for Access-Constrained Funds

By: Gridline Team | Published: 04/18/2022
Est. Reading Time:
5 minutes

Success in investing isn't just about selecting suitable investments - it's also about having access to the best ones. That's why access-constrained funds, or those with access to privileged opportunities, tend to outperform their peers.

In today's Private Equity market, funds of funds and other financial intermediaries can create value not only by selecting but also by being able to access the best investment opportunities.

Why Access Constraints Lead to Outperformance

Pundits often criticize investing minimums, viewing them as a way to keep retail investors from committing capital. While this may be the case in some instances, we believe that, generally, investing minimums exist for a fundamental reason: to ensure that only sophisticated investors with a long-term orientation can commit capital. 

The first access constraint is a minimum committed investment, which reaches as high as $25 million. The high minimum investment size means that many smaller investors are excluded from committing to the best-performing funds. The second access constraint is the number of investors in a fund, which is typically limited to between 10 and 20. 

The high minimum investment size and the limited number of investors in a fund are two key factors that lead to outperformance. By restricting the number of available investors, GPs can avoid the crowding effects that lead to downward pressure on returns. In addition, by only allowing sophisticated investors to commit capital, GPs can avoid short-termism that can lead to suboptimal decision-making. 

The combination of these two factors – the high minimum investment size and the limited number of investors – leads to a situation where GPs can access more exclusive investment opportunities and are more likely to make successful investments. 

Access-constrained funds have a proven track record of outperforming their peers, and LPs with access privileges tend to recommit to these types of funds. If you're looking to invest in private equity, don't just focus on who's making the investments - also consider who has access to the best opportunities.

Sophisticated Investors and Long-Term Orientation

Alternative investments are becoming more mainstream, with retail investors flocking to riskier assets in search of higher returns. However, these investors typically invest for relatively short-term goals: to make a quick profit and move on to the next opportunity. 

Study after study confirms that retail investors dramatically underperform the market and professional investors over the long term. Further, as a UCLA analysis reveals, aside from "meme stocks" like GameStop, retail investors are terrible at momentum investing and consistently underperform. Why is this? 

There are several reasons, but one key reason is that retail investors don’t have access to the best investment opportunities. They lack the relationships, knowledge, and experience to identify and access the best deals. 

In contrast, the investors in access-constrained funds are sophisticated institutional investors with a long-term orientation. These investors are more likely to be patient and take a hands-off approach, giving GPs the time and space they need to make successful investments. 

Moreover, private equity fund terms are lengthening, and "some funds now permit extensions for an indefinite number of successive one-year periods." This trend is likely to continue as LPs are becoming increasingly comfortable investing for the long term.

The idea of an "unlimited time horizon" is also limited to institutional investors who can commit large sums of money for long periods. For retail investors, even a ten-year time horizon can be daunting. 

The J-Curve Calls for a Long-Term Orientation

The importance of a long-term orientation is reflected in the very nature of Private Equity returns, which typically follow a J-curve. 

The J-curve is a graphical representation of the typical path of a private equity investment. In the early years, the investment loses value as the PE firm incurs costs to acquire and turn around the business. In the later years, the investment gains value as the business improves and is sold for a profit. 

Because of the J-curve, investors in PE need to be patient and have a long-term time horizon to realize the total potential return on their investment. 

SoftBank's Vision Fund is an apt example of the J-curve at work. The fund, which was launched in 2017, was expected to lose $24 billion in 2020. However, the fund's backers remained confident in the long-term strategy and remained patient for the J-curve to play out. In 2021, the Vision Fund’s critics were proved wrong as the fund reported a $45 billion group net profit

A Stickier Investor Base

The investors in access-constrained funds are typically a very select group of institutional investors, many of whom have known each other for years. This exclusive group is incentivized to maintain good relationships as they compete for a limited number of high-quality investment opportunities. 

The result is a "stickier" investor base, which is much less likely to redeem its investments early. This sticky investor base gives GPs the time and flexibility they need to make successful investments without worrying about the short-termism that can plague other investors. 

In addition, this exclusive group is typically very well-informed about the private equity market and has a deep pool of knowledge to draw upon. This allows them to make better-informed investment decisions and helps to improve returns further. 

Passive Strategies Lack the Access Edge

In the "passive" versus "active" debate, it's essential not to forget that not all active strategies are made equal, and those with access constraints have a clear edge. 

Passive strategies, such as index funds, are based on the premise that it is difficult to "beat the market." However, this logic does not apply to private equity, where the best-performing funds are often those with access to the most privileged opportunities. 

Many of the world's best investors, such as Warren Buffett and George Soros, have made their fortunes by investing in opportunities unavailable to the general public. 

Therefore, when it comes to private equity, access constraints matter. To achieve superior returns, investors need to access the best opportunities, which can only be done through active, access-constrained deployment.

Gain Access

Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds. It enables individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity. 

With Gridline, you can access the best opportunities in private equity without meeting traditional funds' high capital minimums. And because Gridline only works with experienced fund managers, you can be confident that your money is in good hands. 

So if you want superior returns in private equity, ensure you have access to the best opportunities. With Gridline, you can.

Download this article for later.
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque.
Share this Article
Terms of Service | Privacy Policy | GLBA Notice

This site is operated by Gridline Holdings, LLC ("Gridline"). Gridline does not give investment advice, endorsement, analysis or recommendations with respect to any securities. All securities listed here are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Gridline has not taken any steps to verify the adequacy, accuracy or completeness of any information. Neither Gridline nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy or completeness of any information on this site or the use of information on this site. By accessing this site and any pages thereof, you agree to be bound by the Terms of Service and Privacy Policy

Past performance is not indicative of future results. All securities involve risk and may result in significant losses. Investing in alternative investment funds is inherently risky and illiquid, involves a high degree of risk, and is suitable only for sophisticated and qualified investors. Investors must be able to afford the loss of their entire investment. Alternative investment funds should only be part of an investor’s overall investment portfolio. Further, the alternative investment fund portion of an investor’s portfolio should include a balanced portfolio of different alternative investments. Investments in alternative investment funds are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or limited liquidity. Investments in Alternative investment funds are generally highly illiquid and those investors who cannot hold an investment for the long term should not invest.

Any specific alternative investments funds referenced on this site are included purely for illustrative purposes and selected based on name recognition. Such examples are only partial, and readers should not assume that the investments identified were or will be profitable or are representative of investments by the alternative investment funds identified on this site. There is no guarantee that any alternative investment fund will achieve the same exposure to, or quality of, investments held by any existing fund referenced on this site.

Nothing on this page shall constitute an offer to sell or a solicitation of an offer to buy an interest in any investment partnership or other security. Any offer to sell or solicitation of an offer to buy an interest in an investment partnership may be made only by way of the partnership's final definitive confidential disclosure document and other offering and governance documents of any given fund (collectively, “Offering Documents”). The information on this site is qualified in its entirety and limited by reference to such Offering Documents, and in the event of any inconsistency between this site and such Offering Documents, the Offering Documents shall control. In making an investment decision, investors must rely on their own examination of the offering and the terms of any offering. Investors should not construe the contents of this site as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security.

The information included in this site is based upon information reasonably available to Gridline. Furthermore, the information included in this site has been obtained from sources Gridline believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, and no liability is accepted for the accuracy or completeness of any such information. This site may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.

© 2023 Gridline Holdings, LLC