A new report, Private Investing for Private Investors, released by global investment firm Cambridge Associates, reveals that top-decile institutional investors had a median allocation of 40 percent or more in private investments. Moreover, the report states that private investors and families with substantial wealth may be particularly well positioned to reap the rewards of a higher allocation to private investments.
The report draws on Cambridge Associates’ historical institutional investor data, which showed that institutions that had a 20-year average allocation of 15 percent or greater to private investments, produced a median annualized return of 8.1 percent. This was 160 basis points higher than peers with less than 5 percent allocation in private investments. Focusing on the institutions with highest (top decile) performance, Cambridge Associates reported the average investor who allocated north of 40 percent fared even better. This new report contends that such allocation amounts may be especially appropriate for families with institutional-scale asset levels.
While families have long pursued private investments, Cambridge Associates points to a trend by top-decile performers who have been increasing their allocations in private investments over the last two decades. These investors continued to benefit from higher returns over 10-, 15-, and 20- year time periods. Private investors have the additional ability to leverage the tax-advantaged nature of private investments and invest with a long-term mindset.
The long-term nature of private investments offers tax advantages both in the near term and as part of a wealth transfer strategy. For the most part, private investment returns are taxed as capital gains rather than as ordinary income. Their value can also often be discounted for gift, estate, or inheritance tax purposes.
“Multi-generational families of significant wealth are often well-aligned for considerable private investment allocations,” said Maureen Austin, managing director in the private client practice at Cambridge Associates and co-author of the report. “The precise balance between the need for wealth accumulation for future generations and typically minimal liquidity requirements puts these investors in a unique position where a well-executed private investment allocation can significantly support and extend their legacy. Higher returns, compounded over time in a more tax-advantaged manner, make a sizable allocation to private investments quite compelling.”
Andrea Auerbach, head of global private investments at Cambridge Associates, added, “The very nature of private investing results in an average dispersion of returns of 16.5 percent between the median and the fifth percentile, which will be captured by the investor who is informed, prepared, and able to manage the illiquidity these strategies require to generate the target returns.”
Cambridge Associates’ private investments team comprises more than 60 specialists and portfolio managers, building upon the firm’s 45-year track record of thorough manager due diligence and expert selection. The private investments team manages and executes co-investments, sector-specific fund strategies, direct investments, real estate and private credit allocations, and more, providing access for clients across the firm.
Private investments often play a prominent role in the customized portfolios the firm builds and manages on behalf of its private clients, comprising families and single-family offices around the globe.
“The long-term time horizon that comes with private investing aligns well with the time horizon for multi-generational families and is often central to our investment strategy with each family. However, to be maximally effective, a private investment program must be minutely suited and built from the bottom up to align with the specific needs and interests of each investor,” explains Mary Pang, global head of the private client practice at Cambridge Associates. “Constructing such a bespoke portfolio that aligns with a family’s goals, interests and generational concerns is a key focus for us.”
To read the full report, co-authored by private investment and private client specialists Austin, David Thurston and William Prout, click here.