Why International Investors Invest in American Private Equity

By: Michael Megarit

The private equity market continues to grow, with the United States leading the way. In its 2019 Global Private Equity Market report, the Bain group noted that amid heavy pressure to do deals, the PE industry saw another impressive surge in investment value in 2018. Fierce competition and rising asset prices have continued to constrain deal count, pushing down the number of individual transactions by 13%, to 2,936 worldwide—but total buyout value jumped 10% to $582 billion (including add-on deals), capping the strongest five-year run in the industry’s history. Some of the leading private equity managers include KKR, Carlyle, Blackstone and Apollo.

Private equity investing is defined by equity investments made in operating companies that are not publicly listed and traded on a stock exchange. PE investment opportunities fall into two main categories—corporate finance and venture capital—generally characterized by the company’s life-cycle stage and how the company uses capital. The primary reason for investor interest in private equity (PE) is its return enhancement potential. A well-implemented private equity portfolio may achieve a return of 4% to 5% in excess of public equities over the long term. PE investors expect to be compensated with excess returns, given the characteristics of PE investments: a long investment period, relative illiquidity and a return profile that may be negative in the early years and positive in the middle to late years. But why do international investors invest in American Private Equity Market?

One of the main reasons why international investors invest in American Private Equity is diversification. International investing may help investors to spread their investment risk among foreign companies and markets in addition to U.S. companies and markets. Constructing a diversified private equity portfolio designed to meet an investor’s return and risk objectives requires knowledge of and access to a broad array of private equity investment opportunities— across strategies, geographies, industries and vintage years—available through funds or direct investments, in the primary and secondary markets. Investment opportunities tend to be cyclical, with certain strategies and geographies performing better than others in different market environments. A commingled fund that diversifies among management styles and strategies should have the potential to deliver performance across the various stages of a market cycle. The American Equity Market offers such opportunities.

Another reason why International Investors invest in American private equity fund is growth. A systematic and consistent approach to private equity—namely, committing to attractive investment opportunities each year—is the optimal strategy for most private equity investors. Private equity investment performance is dependent upon numerous exogenous factors, including the business cycle, the receptivity of public debt and equity markets, and capital flows into the private equity market, making it impossible to accurately “market time” private equity investments. What’s more, illiquidity and contractual obligations of commitments limit the ability to tactically enter and exit the market. The growth of the American equity market tends to be stable, hence attracting international investors.

Finally, the biggest private equity fund managers are in America. Since investors are always looking for established and knowledgeable fund managers, the American market private equity offers the confidence for international investors.

American Private Equity, Equity Funds, International Investors