Private Equity Could Be This Year's Hedge Fund; Lower Minimums Draw More Individual Investors
August 5, 2005
Once reserved for only the wealthiest of individual and institutional investors, private equity funds are now targeting more high-net-worth individuals by slashing the minimum investment to as little as $25,000. That's a far cry from the $10 million ante demanded by some of the more expensive funds.
Fees can be high and so can the risks, but this summer sale could make private equity funds this year's alternative investment of choice for wealthy individuals seeking higher returns, The Wall Street Journal reports.
More and more retail and investment banks - like Citigroup, Goldman Sachs and JPMorgan Chase, as well as private banks and trust companies including Northern Trust and Charles Schwab's U.S. Trust subsidiary - are partnering with noted private-equity funds like Blackstone Group and Carlyle Group to offer lower minimum investment products to their clients.
For the everyday investor, there are a host of hurdles that accompany entry into to even the most accessible private equity fund. That can range from required annual contributions called "drawdowns"; lockup periods that can run upwards of 12 years; fees that can be outrageously high; and since most private-equity funds bank on a windfall when the companies they've invested in go public, there's a chance those companies might never live up to expectations and cause the whole investment to go bust.
But the capacity of private equity funds to deliver big returns - typically around 15% to 30% yields on a 10-year fund - amid otherwise tepid markets, is drawing investors. Last year, private-equity funds drew $69.5 billion, up from $41 billion in 2003. So far in 2005, they've raised $47 billion and brought their assets to about $711 billion. By comparison, hedge funds boast $1 trillion in assets.
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