The Evolution of Private Equity
One of the key themes of Livewire’s Listed Series is that the space has matured beyond simple index-based exposure to a dynamic, sophisticated ecosystem that now offers access to a diverse range of asset classes and strategies. Arguably nothing better represents that shift than global private equity, which has transitioned from a rarified asset class to an accessible alternative opportunity set.
Globally, private equity is an asset class that has outperformed the stock market on average over the last few decades, even as this outperformance has moderated in recent years. But it remains a fast-growing sector that is increasingly home to some of the world’s most important companies.
Pengana Capital Group’s Executive Director Adam Myers highlights this trend, stating:
“Over the last decade, we have seen significantly more economic activity and, by extension, economic value being created in private markets. Really innovative, dynamic businesses don’t have to go to the public markets to raise capital.”
This means investors avoiding private equity as an asset class are now denying themselves access to some of the most promising opportunities available anywhere in markets.
“There’s an abundance of capital available in private markets,” says Myers. “What that means is that investors who want to access that segment of the market need to do so with private allocations.”
The Opportunity on Offer
Not only has the opportunity set in global private equity strengthened in recent years, so too has its accessibility. ASX-listed products like the Pengana Private Equity Trust (ASX: PE1) offer exposure to diversified global private equity investments and bridge the gap between private equity and regular investors.
“Historically, large institutions were more easily able to access private markets, and this was typically because they were better placed with the complexity of investing and the complexity of maintaining their investments, and also obviously the long-term nature better suited them,” said Myers.
“PE1 helps to bridge that gap because we invest in a highly-diversified portfolio of global private equity investments,” he says. “We’re targeting top-quartile returns, but the difference is that we are listed on the ASX, which means that investors can come in and access this diversified global private credit as long as you’ve got a stockbroking account in a size that suits your portfolio.”
Private equity is a “long-term investment” by definition, says Myers, and that means getting the balance right within the portfolio to help generate sustainable returns.
“When we are making these investments, right now is important, but tomorrow’s environment is equally important and we can’t necessarily anticipate it,” says Myers.
While private equity is often associated with high-growth tech, Pengana also invests across logistics, infrastructure and healthcare – targeting companies that offer long-term resilience.
“The most resilient private equity programmes will have a very stable base of diversified companies that are cashflow generative, that can grow earnings in resilient industries to provide that stability.”
“What that does is it allows us to take targeted exposure to more high-growth opportunities without materially changing our risk profile.”
But tech naturally remains a key area of focus for private equity and also for Pengana. SpaceX is the fund’s largest underlying portfolio company exposure, and PE1 is the only way to get access to the company on the ASX.
The trend of private companies staying private longer also arguably has its most notable examples in the tech/AI sector, and it’s a trend Myers expects to continue.
“We think it’s likely that the exceptional AI businesses will continue to emerge in private form, and generate significant capital, long before they ever think about going public,” he says.
“The poster children for the sector are probably OpenAI and Anthropic – both are worth hundreds of billions of dollars and they are still private. But there’s a raft of less well-known companies in the private space that we’re equally excited about.”
For investors wanting to access truly exceptional companies earlier, private equity is increasingly the way to do so.
The Importance of Manager Selection
While the opportunity set in global private equity is increasingly compelling, it’s not a case of a rising tide lifting all boats in the asset class.
“In private equity, there isn’t an ability to buy a benchmark or get passive-type index returns, so really outcomes are going to be driven by manager selection and manager access,” says Myers.
The divergence in performance across the asset class may be unfamiliar to investors more used to equities and other markets.
“The difference in returns between the top cohorts and the bottom cohort is significantly wider [than public markets],” says Myers. “Even the difference between the top and the mean or the median is much wider than we are used to in public markets.”
“The key is manager selection and identifying the managers that are most likely to perform going forward, because past performance doesn’t necessarily indicate future performance, especially in private equity.”
But getting the crucial aspect of manager selection right then opens the door to superior returns and further diversification.
“Private equity has historically outperformed listed equities, and it has also historically done it with lower volatility and lower correlations, which means that there are portfolio construction advantages as well.”
And with the asset class now more accessible than ever, through vehicles like PE1, it’s a crucial consideration for investors wanting to extract as much potential as possible.
“More and more of the economic activity is now taking place in private markets, if you only allocate to public markets, you aren’t getting access to the full opportunity set. And the broader your opportunity set, theoretically, the more resilience and more complete your portfolios will be.”
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