Risk Management Tips for SMSFs Investing in Private Equity

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Reach Alternative Investments
October 30, 2023
min read

As a self-managed super fund (SMSF) trustee, dipping your toes into the world of private equity can feel like uncharted waters. While historically private equity has delivered better returns than traditional investments, it is not without its risks (past performance is not indicative of future performance). This fact, coupled with its complex nature and less liquidity, often places it on the sophisticated end of the investment spectrum — a fact not lost on SMSF investors looking to diversify their portfolio. Here's your guide to navigating the realm of private equity investment with adept risk management.

What is Private Equity and How Can it Fit within an SMSF Portfolio?

Private equity refers to capital investment made into private companies — those not listed on a public exchange. These investments are usually long-term and aim to achieve high returns through a variety of strategies, including leveraged buyouts, growth capital, and venture capital. For SMSF trustees, private equity can provide a unique diversification strategy, potentially boosting overall fund performance.

What Types of Risks are Associated with Private Equity investment?

Investing in private equity comes with inherent risks - including liquidity risk, valuation difficulties, and the prospect of increased leverage. Understanding this risk profile is paramount for judicious risk management. Ensuring your SMSF is equipped to manage, mitigate and, if necessary, absorb these risks is key to successful private equity investment.

How Can I Manage Risks When Investing in Private Equity?

Effective risk management strategies are integral to a successful private equity investment plan. Here are a few strategies to consider:

  1. Diversification: Invest across multiple private equity funds to mitigate the impact of any single fund's underperformance. Seek diversity in terms of sectors, geographies, and investment stages (e.g., venture, growth, buyout) to spread and manage risk more effectively.
  2. Thorough Due Diligence: Prior to committing capital, conduct in-depth research on the private equity fund's track record, management team, investment strategy, and historical returns. Understanding the fund's approach and expertise can offer insights into potential risks and rewards.
  3. Co-Investment Opportunities: Leverage co-investing to align with seasoned private equity players. This strategy not only allows for shared risk but can also provide access to better deals and the expertise of established investors, enhancing the potential for higher returns.
  4. Monitoring and Reporting:Opt for funds that provide transparent, regular, and detailed reporting. Active monitoring of fund performance, understanding the portfolio's health, and being aware of the fund's decisions can be crucial in assessing ongoing risks and making informed decisions.
  5. Understand Fund Terms and Exit Strategies: Familiarise yourself with the fund's terms, including fee structures and lock-up periods. Also, ascertain the fund's exit strategy for its investments. A clearly defined and feasible exit plan can influence liquidity and return outcomes.

When investing in private equity funds, always bear in mind the inherent illiquidity and long-term nature of these investments. Proper risk management can enhance the potential for rewards while mitigating potential downsides.

Why Choose Reach Alternative Investments for Private Equity Exposure?

For wholesale investors seeking exposure to the best global, private equity funds, Reach Alternative Investments presents a compelling choice. Our platform and team of experts offer curated, high-quality private market funds and create an effective legal structure in Australia. We're committed to prudent and responsible investing, aiding our clients in making the private markets easier, better, and, most importantly, transparent.

In Conclusion: Is Private Equity Right for Your SMSF?

Like any investment, private equity isn't without its degrees of risk. But with research, understanding, and careful risk management, it can offer an intriguing proposition for SMSFs. As long-lived investment vehicles, and with potential for great returns, private equity can be a worthwhile inclusion in the right SMSF's diversified investment strategy.

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