Investments in Private Equity are often seen as the golden ticket to outsized returns. Glossy brochures and confident fund managers promise access to exclusive opportunities and market-beating performances. But for retirees, or those approaching retirement, this “fashionable” asset class may carry more risk than reward.
This article’s purpose is to attempt to answer: Is this investment truly in your best interest?
What is private equity?
Private equity involves investing in assets that are not listed on public stock exchanges. These investments are typically made through private funds that pool investments from institutional investors and high-net-worth individuals. Their goal? Buy, improve, and sell businesses or real estate for a profit.
Sounds appealing, right? But there’s a catch. Private equity is complex, opaque, and illiquid. And that’s where the trade-offs begin.
High returns
Private equity funds often tout impressive historical returns. But these figures can be misleading. Unlike public markets (like the share market), where performance is transparent and prices are updated daily, private equity returns are self-reported, and some can be subject to a little bit of creative accounting. What’s more, the returns are often “smoothed” over time, masking the real and underlying volatility and risk.
For retirees, this lack of transparency is something to be cautious of. You may not know how your investment is truly performing.
Liquidity | The hidden trap
One of the most significant risks of many private equity investments is its illiquidity. Once your money is committed, it can be locked up for extensive periods, from a number of months to several years. As happens for many of my clients, where their financial needs change due to health issues, family support requirements, or unexpected life events, this can be real problem if private equity isn’t applied in the right doses.
From my experience, flexibility is key, to stay the course, and ‘respond’ to market conditions, rather than be forced to ‘react’ to adverse returns or liquidity lock up.
Fees
Private equity funds are notorious for higher fees, sometimes 2% per annum in addition to up to 20% of the profits. In other words, you take the risk with your money, the private equity team take the rewards. I have a philosophical issue with this approach, and that’s before we see your returns eroded by such bonuses.
Who really benefits?
In many cases, it’s the fund managers, not the investors. The structure of these funds often incentivises short-term gains over long-term stewardship.
A fiduciary’s role is to act in your best interest, not to chase trends or follow the crowd. Your money needs to be positioned to reward you and your family over time, with the least amount of risk, commensurate with your comfort level when placing investments and positioning your portfolio.
A better way forward
I’ve had clients on both sides of the coin, where their venture into private equity has been a rewarding experience, and others who have reported deep levels of regret.
Nonetheless, I’m not saying private equity has no place in a portfolio. For some investors, in the right context, it can offer diversification and growth. But for retirees, or those nearing retirement, the risks often outweigh the rewards.
Instead, we advocate for a disciplined, evidence-based investment approach that emphasises liquidity, transparency, and alignment with your life goals. Because true prosperity isn’t about chasing the next big thing. It’s about building your best life, wisely growing and using the resources at hand.
Let’s talk about what matters most to you.
If you’re considering private equity, or any complex investment, consider a conversation to best understand the risks, rewards and how it may be best placed to provide the returns you and your money deserve.
