Self-managed super funds (SMSFs) are an effective way for Australians to take control of their retirement investments. They offer flexibility and choice of investments, including non-traditional asset classes such as private equity. Despite the promising returns that investing in private equity may offer, there are potential pitfalls for unaware SMSFs owners. This article aims to guide you through five common mistakes often made by SMSFs when investing in private equity.
Among the hallmark attributes of private equity investments is their illiquidity. Unlike publicly listed equities, private market investments cannot be quickly converted to cash. Owning to the long-term commitment they require, SMSF owners should ensure they have sufficient liquidity for other potential financial obligations before making significant allocations to illiquid assets.
The ‘Winner's Curse,’ a well-known phenomenon in the private equity space, refers to the tendency for the highest bidder for a private company to often overpay. SMSF owners should carefully review and conduct due diligence on target companies to avoid falling into this trap. Financial modelling, industry research and a prudent evaluation of the management team can enhance the investment decision-making process.
While it can be tempting to concentrate your investments in high-performing areas or sectors, it's crucial to remember the importance of diversification. Investing in a diverse range of private equity funds across different sectors and geographic locations can help spread risk and potentially improve your SMSF's investment returns.
Choosing the right fund manager is fundamental in private equity investments. SMSF owners should look for managers with deep market knowledge, proven track records, and robust risk management strategies. Moreover, managers who offer transparency and a strong alignment of interest are likelier to add value.
Navigating compliance in the realm of private equity can be complex, but it's an essential part of investing via your SMSF. Engaging with a professional adviser who understands the dynamics of the Corporations Act 2001 and the nuances of being a 'sophisticated' or 'professional' investor, as defined by Australian Law, can save you from potential legal issues.
In conclusion, while private equity offers potential high returns, SMSF owners must be conscious of possible pitfalls, and avoid these five common mistakes. By understanding and navigating these risks, SMSF owners can access global top-tier private market funds and potentially build a more robust retirement portfolio.