KKR Releases “Regime Change: The Role of Private Equity in the ‘Traditional’ Portfolio”March 1, 2023
New Macro Report Highlights Importance of Harnessing the Illiquidity Premium in a Low Return Environment
“From our perch, Private Equity makes a lot of sense for buy and hold investors, especially retirement focused investors who want to compound capital at more efficient tax rates than many income oriented products provide. We also believe that, if our team is right in our assumptions about lower forward returns across capital markets, the value of the illiquidity premium, especially in Private Equity, will become more important,” said McVey and Allouani.
As part of their analysis, McVey and Allouani spend a significant amount of time outlining the critical drivers of Private Equity’s strong performance in recent decades, so that both institutional and individual investors can better understand its role when thinking through their asset allocation goals. According to McVey and Allouani, the following drivers of Private Equity performance warrant investor attention:
- Sector Allocation: Private Equity sector exposures are often meaningfully different from those of Public Equity indices and can often be a significant source of alpha. Broad sector compositions in different vintages of Private Equity funds also tend to be more dynamic than public markets indices, which can take much longer to adjust. This allows private markets investors to be more nimble in pursuing value creation opportunities at the right time.
- Timing Effect of Deployment and Exits: Timing of investments has been a key contributor to Private Equity’s absolute and relative performance over the past three decades. We believe that maintaining disciplined linear deployment can help create portfolios that are more balanced. That said, as we look forward, we believe that Private Equity Managers can be even more proactive in systematically exiting portfolio investments in fully priced markets.
Company Selection and Value-Creation: Much of the dispersion in performance among Private Equity Managers comes down to their ability to create value through operational improvement, strategic vision, employee engagement, and sturdy capital structures. The average difference between top and bottom quartile managers across vintages has been around 13% historically, compared to around 5% for active
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About Racim Allouani
Racim Allouani joined KKR in 2015 and oversees
KKR is a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of
The views expressed in the report and summarized herein are the personal views of
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