Traditional investment sources are no longer providing desired returns, but private equity can enhance yields, writes Joe Pochodyniak
Our clients’ desire for lower volatility and higher income hasn’t changed much over the years, but in this low rate environment, it’s no longer coming from traditional sources. Clients are increasingly becoming discouraged with traditional investment sources – and for good reason. Bond yields are negligible, and equities are increasingly volatile, particularly in connection with the ongoing spread of the coronavirus and its implications on economic growth and the recent fall in crude oil prices. These factors are leading investors to look at other options.
For years, private equity has been a mainstay in many institutional and endowment fund portfolios. These institutions’ allocations to alternatives, and as a result private equity, have grown from an average of 6% in 1999 to 25% in 2017, according to McKinsey. In 2019, the Canadian Pension Plan Investment Board allocated 24% of their portfolio to private equity, while the Ontario Teachers’ Pension Plan allocated 19%, the Yale Endowment Fund allocated 38%, and the Harvard Endowment allocated 20%.
Private equity is an asset class consisting of operating companies that are not publicly traded on a stock exchange. Private equity is a source of investment capital from high-net-worth individuals and asset managers, and it functions to secure equity ownership in companies, as well as lending to them. Private equity has a low correlation to other asset classes, can act as counterbalance in a portfolio and can provide investors with overall capital appreciation where investments can benefit from additional operational expertise or capital. Private equity is not a liquid investment, and it’s not for the impatient.
As an asset class, private equity has been growing significantly over the last two decades. According to McKinsey’s Global Private Market 2019 Review, private equity’s net assets have grown more than sevenfold since 2002; global private-market AUM now totals $5.8 trillion. That rate of growth is twice as fast as global public equities.
The number of private equity investment opportunities has also risen. In 2006, there were approximately 4,000 private-equity-backed companies in the US. By 2017, that figure had jumped to approximately 8,000. In the same time period, the number of publicly traded companies dropped by 16% from 5,100 to 4,300. McKinsey’s report also notes that even larger investors that once shied away from the asset class are now allocating to private markets as a means gaining diversified exposure to global growth.
At MacNicol & Associates Asset Management, our private equity strategy seeks opportunities where capital exit strategies are clearly defined and are likely to occur within a three-year timeframe, and we have approximately one third of our alternative asset program allocated to private equity.
Though we invest in a wide variety of privately held firms, our focus recently has been on data analytics and artificial intelligence, particularly with a focus on healthcare. Many of our healthcare names in this space enable their clients to better connect with patients in their local markets. By offering proprietary cloud-based tools in a systematic, HIPAA-compliant manner, many of these companies are able to offer highly scalable data management solutions to allow medical clinics to enhance profit margins and smooth revenues.
Examples of companies in this space include California-based PatientPop and Utah-based AdviceMedia. These are firms that are tracking at 50% EBITDA margins and are able to raise capital effectively. For example, in 2019, Connecticut-based Diameter Health, a clinical data integration company, raised nearly $10 million in a Series A funding round led by Optum Ventures.
Considering that healthcare digital marketing spending is predicted to rise, according to eMarketer, and that 5% of all Google searches are health-related, our Emergence Fund is well on its way towards offering unitholders opportunities to enhance their portfolios with a data-driven way to participate in the growth of the primary care industry in the United States and globally.
Joe Pochodyniak is a senior portfolio manager at MacNicol & Associates, where he focuses on real estate, private equity, hedge funds and alternative asset class strategies. He has more than 15 years of experience in asset management and private investment counselling.
