Private equity investments are equity positions in privately held companies. Just as in publicly-traded companies, the equity owners can benefit from the company’s growth and upside value potential.

Leveraged buyouts (LBOs) are the most prevalent private equity strategy. In an LBO, a private equity firm uses a combination of debt and equity capital to acquire an entire company (either an existing private company, or a public company in a take-private transaction). As the control owner of the company, the private equity firm has a range of options to generate returns: management team changes, operational improvements, expansions, strategic acquisitions, etc. The private equity firm seeks to sell the company for a higher price, generally targeting 4 to 6 years from purchase to exit.

Growth equity investments typically are partial, non-control equity investments in fast-growing companies. These companies need capital to accelerate strategic growth plans but are not interested in being fully acquired. Growth equity investments typically follow venture capital investments into mature startup companies.
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Private equity firms need capital to pursue their various strategies. This capital comes from underlying investors (“Limited Partners”) in private equity funds, which typically include institutions (e.g., university endowments, foundations, pension plans, insurance companies), family offices, and ultra high net worth individuals. These investors benefit from the performance and value creation in private market companies that are not otherwise accessible in public markets. Our Fund investors now have the same opportunity to participate in private market investments.

Source: Hamilton Lane Data, Bloomberg (January 2024)¹

Private equity has consistently outperformed the S&P 500 in bear markets and bull markets. This chart illustrates the additional return observed based on the performance of the S&P over 3 year periods.

Private equity and public equity serve similar roles in the portfolio: equity investments, as a broad asset class, can capture economic growth as reflected in rising corporate earnings and profitability. ‍
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Equity investments offer uncapped upside potential and over long time horizons can be the biggest driver of total portfolio returns. Both public equity and private equity also share similar risk factors. Consequently, we believe public and private equity allocations should be considered together and collectively should be the largest allocation in a diversified portfolio.

Drilling down a bit further, private equity offers exposure to the large swaths of the U.S. economy that increasingly are not captured in public equity markets². As private and often control-oriented investors, private equity firms typically can more efficiently and effectively impact the companies in which they invest. However, they need stable, reliable capital to execute on their strategies - investments in individual companies take years to execute from start to finish. Private equity investments are therefore illiquid in nature.

We believe a long-term, diversified portfolio can, and should, pursue the excess return potential of private equity in exchange for less liquidity in that portion of the portfolio. It’s important that investors take on this illiquidity with eyes wide open. Here at Ivy Invest, our CIO has been evaluating and investing in private equity for over 18 years and has the depth of experience to thoughtfully navigate the risk, liquidity, and return tradeoffs.

A well-run established institutional private equity program includes: 1) strategy diversification, 2) vintage year diversification, and 3) investing with experienced managers.

The Fund’s private equity fund investments include experienced managers we know well that we believe are also capable of providing broad market exposure. These managers are specialist secondary private market investors and can be strategically advantageous for building the Fund's private equity allocation.

Read more about our CIO's insights on private equity and private equity secondaries.

¹ ”High” return environments are considered Public Market 3Y annualized returns from 10% to greater than 15%; “Low” and “average” return environments are considered Public Market 3Y annualized returns of less than 5% up to +10%. Chart compares private equity index time weighted returns vs. public equity time weighted returns. Returns do not include the reinvestment of dividends. Returns do not reflect the impact of fees and expenses, which would decrease the returns if included.
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² An April 2023 report estimates that as of December 2022, there were approximately 18,000 U.S. private equity backed companies (source: E&Y). In contrast, there are approximately 4,600 publicly listed U.S. companies (source: World Bank). To take it a step further, fewer than 15% of U.S. companies with revenue over $100 million are publicly held (source: Bain and Co).