The Importance of Diversification

The Importance of Diversification

Private equity investors will be acutely aware of the slowdown in exit markets. This is impacting many parts of the private equity market, not least leading to a reduction in distributions back towards investors. In turn, capital calls are causing many investors to experience negative cash flows. If anything, the current market highlights the need for diversification across vintages, so investors can benefit from investments across the cycle, with funds exposed to differing phases of investment and divestment. What’s more, investors should also look to achieve broad exposure across industries within their private market commitments, so no single part of their portfolio is overexposed to potential weakness or market stresses.

And over time the market will recover – as it generally does. Managers will not sit on their hands and wait for this to happen, using the tools at their disposal to manage their exposure and do what they can to the benefit of their investors. Tools such as continuation funds and NAV loans are some examples of the toolkit at their disposal. Increased activity in the secondary market is another. While the timing is still uncertain, interest rates should begin to fall too, potentially bolstering the market and improving the exit environment. It may be a tough market at present, but we believe it is unlikely to remain that way in the long-term.

Read our paper to find out more.