Private equity is currently experiencing a surge in popularity among members of Tiger 21, a network of ultra-high net worth entrepreneurs and investors. The founder and chairman of Tiger 21, Michael Sonnenfeldt, revealed that their members, who collectively manage around $150 billion in assets, have increased their allocation to private equity threefold over the last decade. Sonnenfeldt believes that this investment strategy is justified because private equity is where businesses are still scaling.
According to Sonnenfeldt, Tiger 21 members have trimmed down their public equities and reduced their real estate holdings due to rising interest rates. However, they see private equity as the most lucrative option because it offers the potential for high returns when investing in rapidly-growing businesses. Sonnenfeldt mentioned that AI, climate, and energy markets are areas that Tiger 21 members believe will provide significant growth opportunities in the long term.
The interest in private equity is reflected in its increasing share of members’ portfolios. Sonnenfeldt revealed that private equity has grown from 10% to 30% of their portfolios over the last decade, with venture capital comprising a larger portion than ever before.
However, not everyone shares the same optimism about the future of private equity. Dan Rasmussen, founder and chief investment officer at hedge fund Verdad Advisers, believes that the industry is facing a “perfect storm” due to sharp rises in interest rates and falling tech valuations. Rasmussen pointed out that most private equity is leveraged, which means that rising interest rates have resulted in higher interest costs for private equity firms. In comparison to the median interest costs for the S&P 500 companies, private equity firms have seen a significant spike.
Additionally, private equity is heavily exposed to the technology sector, which has experienced falling valuations. Rasmussen mentioned that as technology multiples come down, it creates an additional problem for the industry. This, combined with higher debt levels and premium valuations for acquisitions, has led Rasmussen to express concerns about the fundamentals of private equity investments.
While some big tech companies with exposure to AI have seen their valuations soar, smaller firms with higher leverage have not experienced the same level of success. The U.S. Federal Reserve’s decision to increase interest rates over the past 18 months has also negatively impacted highly leveraged portions of the market targeting rapid growth.
Despite these concerns, private equity remains a popular asset class among sophisticated investors, with many endowments and family offices allocating a significant percentage of their portfolios to it. Some experts believe that the enthusiasm for private equity may not align with the financial fundamentals of sponsor-backed companies.
In conclusion, private equity has emerged as the preferred investment choice among Tiger 21 members, with their allocation to this asset class increasing significantly over the past decade. However, there are contrasting views on the future of private equity, with some experts raising concerns about rising interest rates and falling valuations. Only time will tell whether private equity will continue to reign as the “king” of investments or if it will face challenges in the coming years.