Relatively illiquid private market assets consistently outperform their more liquid public market counterparts. For example, the median private equity fund returns a net IRR of 19.5%, while the S&P 500 is projected to return just 6% annually over the next decade.
This outperformance owes to the more significant gains realized by investing in early-stage businesses and holding them long-term. In addition, alpha from private equity is often generated through operational improvements rather than simply exploiting cyclical market fluctuations.
Moreover, a liquidity premium exists for private market assets, as investors are compensated around 3% a year for the added risk of not being able to sell their investment quickly if they need to.
The popularity of long-term strategies is rising due to these attractive characteristics, particularly in an era of increasing uncertainty in the public markets.
The growth of long-dated funds
Most regular venture funds already have a 10-year life span, understanding that it takes time to build successful companies. However, an INSEAD report finds a surge of general partners (GPs) raising even longer-dated funds, with lives in the range of 15-20 years.
Large PE firms, including CVC Capital Partners, The Carlyle Group, and Blackstone, are being driven by large PE firms, launching buyout funds with extended holding periods.
For instance, Blackstone raised $5 billion for a fund with twice the expected holding periods of a traditional buyout fund. Meanwhile, two first-time funds, Core Equity and Cove Hill raised more than $1 billion each with anticipated holding periods of up to 15 years.
Benefits of long-term strategies
It’s worth noting that a long holding period does not always mean that invested capital is wholly tied up for the entire duration. Disbursements can begin as early as year five or six, with VC-backed companies going public on average 5.3 years after securing their first investment.
By design, venture funds aim to have their principal back by year seven, which can then be reinvested for compounding. This is advantageous for investors who receive higher returns and RIAs who can lock up assets with fewer distractions.
There are other benefits associated with particularly long holding periods as well. For example, lower transaction costs, such as taxes and consultant fees, are associated with buying and selling businesses. In addition, fewer distractions for portfolio company management can lead to better decision-making and improved performance.
Further, deferred taxation of capital gains allows capital to compound over time, providing even more upside potential. And with more flexibility on the investment horizon, funds can sell an asset at the optimal time rather than being forced to exit due to an arbitrary timeline.
Exploring lower returns in liquid assets
While always-on public markets have made it easier to trade in and out of investments, this liquid environment may harm long-term returns.
One study by Berkeley showed that individual investors consistently underperform market indices at an average of 1.5% a year. The more active the investor, the worse the performance.
Just as individual investors are notoriously bad at picking stocks, they’re also terrible at timing the market. To some extent, investors in private markets are shielded from this problem, as they can’t always buy and sell their assets on demand.
Of course, illiquidity comes with its own set of risks and inconveniences. But for long-term investors, the higher returns generated by private market assets more than make up for it.
To take advantage of these returns, however, investors need a way to gain exposure to private assets without having to meet high capital minimums or contend with prohibitive fees.
This is where Gridline comes in. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.