Private equity has evolved into a global investment phenomenon, with assets under management (AUM) totaling an impressive USD 14.5 trillion as of mid-2023, and growing 22% per year during the last five years. This surge is driven by multiple factors, including the above-average returns it offers over the long term, and the fact that companies now stay private for longer. In the US, the median age of a company at the time of its IPO nearly doubled between 1980 and 2021, meaning that these days the lion’s share of growth happens while companies are still private, driving more investors worldwide toward private equity.

Considering the above, it’s not surprising that prominent figures like actors Robert Downey Jr. and Ashton Kutcher, singers like Jay-Z, and numerous Swiss investors have embraced private equity as a cornerstone of their wealth accumulation strategies. Accordingly, a 2023 report from Campden Wealth and Titanbay on investment trends among UHNWIs revealed that the average portfolio allocation to private equity is anticipated to experience the most substantial increase when compared to other asset classes.

Overall portfolio asset allocation: current and target
Source: Campden Wealth & Titanbay

Unfortunately, individual investors can rarely boast of having private equity in their portfolios. For a long time, private equity has been beyond the reach of many aspiring mass affluent investors due to the high minimum investment thresholds of CHF 1 million, often reaching as high as CHF 25 million, posing a significant barrier to entry.

Thankfully, the investment landscape is evolving, offering new opportunities. That said, do mass affluent investors truly have the opportunity to invest in private companies? The short answer is yes, but the long answer is a lot more nuanced. This article delves into the “what, why, and how” investors can enhance their investment portfolios with private equity in Switzerland.

What Is Private Equity?

Private equity (PE) is an alternative asset class involving investment in private companies in exchange for equity or ownership. Unlike publicly traded entities, private companies operate outside of stock exchanges, making them less accessible to the public. This also exempts private equity in Switzerland from public market regulations, though the operations of private companies are still monitored, as will be discussed later.

Private companies raise capital from accredited investors, such as wealthy individuals and institutional investors, who hope to earn a competitive, often double-digit, return. According to the Private Equity Investing Report 2023 from Titanbay and Campden, 84% of ultra-high-net-worth (UHNW) investors are involved in private equity investing, with 20% of their portfolios being allocated to this asset class.

On average, investors plan to increase their private equity allocation by an additional three percentage points (pp) (to 23%) and tilt their private equity portfolios further towards direct investments (+4pp to 56%).
— The Campden Wealth and Titanbay Ultra-High Net Worth Private Equity Investing Report 2023

These numbers are far from shocking given that, in most cases, returns from investments in private equity exceed those from public companies. At the same time, a significant share of investments is focused on the stages of private companies’ growth when the risk/return ratio is most optimal. The chart below demonstrates this concept well, showing how the risk and return profile changes as a company progresses from the launch stage to the preparation for IPO.

The risk and value profile of private companies
Source: Commonfund

Why Should You Consider Investing in Private Equity?

Private equity offers several compelling advantages. The first one is actually a key reason why wealthy people usually have private equity in their portfolios: the potential for greater value creation and higher returns compared to public companies.

According to the Cambridge Associates report, which compares the returns of about 1’500 private equity funds with the Russell 3000 Index, private equity has consistently outperformed stocks over the past 20 years. In fact, private equity funds have achieved an average annual return of 14.61%, compared to 9.91% for the Russell 3000 Index. As the next chart illustrates, the time-weighted rates of return (TWRs) are significantly higher than those of popular stock market averages, as well as more regular and consistent.

All private equity 10-year rolling TWRs (in %)
Source: Hamilton Lane

The reason behind these greater returns lies at the core of private equity investments, which is foreseeing investing in a company during its initial, active growth stages. At this point, the company requires substantial funding to ensure constant expansion and increased profits.

Type of private equity investment regarding the corporate lifecycle
Source: ResearchGate

The chart above also explains the low liquidity of private equity, seeing as such companies are not traded on public exchanges. This illiquidity is in fact the trade-off for the potential benefits of reduced exposure to general market fluctuations, as valuations are not subject to daily changes. It also makes these investments less volatile because investors can avoid panic selling due to the minimum holding period of approximately 10 years or more, and treat them as long-term oriented.

Another important benefit of private equity is access to emerging industries and technologies that are not easily accessible through public markets. Sectors such as artificial intelligence (AI), neurotechnology, and cleantech present substantial growth potential, yet only a few promising companies within these sectors have gone public and are available for investment by everyone.

The global AI market, for instance, is expected to reach around USD 2.57 trillion by 2032, growing at a compound annual growth rate (CAGR) of 19% from 2023 to 2032. Such significant market growth highlights the revolutionary role of AI. Given that the industry is relatively young, the reality is that most leading players are privately held. These companies have the greatest potential for growth and, consequently, investor returns, but sadly, those who don’t have access to these companies will miss out on most of the profit growth.

Last but not least is its low correlation with other asset classes, including public equities and bonds. According to Morningstar, private equity and the Morningstar US Market Index, which measures the performance of large-, mid-, and small-cap stocks in the US and represents the top 97% of the investible universe by market capitalization, have a correlation of 0.80, while venture capital and the same index have a correlation of 0.71. What’s more, the CFA Institute indicates that annual private equity IRRs and S&P 500 returns have a correlation of 0.15 over 25 years.

The superior performance of private markets and their low correlation with public market assets make them a great choice for portfolio diversification. A portfolio of low-to-negatively correlated assets can “dramatically reduce your risks without reducing your expected returns.” With enough portfolio diversification, investors are less likely to suffer major drawdowns, according to the “Holy Grail of Investing” Ray Dalio.

Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.
— Ray Dalio in his book Principles: Life and Work

Choosing the Right Private Investment Vehicle

Given how attractive private equity is, the question arises: How do you access its many benefits? While investing in private equity has become easier, investing in the public market is still the simplest option. To clear things up, we’ve highlighted two of the most widely used investing approaches: funds (private equity funds and funds of funds), and individual private equity deals. The table below showcases the main differences between these approaches.

Investment vehicle Minimum investment Available for the mass affluent to invest?
Private equity funds From CHF 250’000 to CHF 25 million No
Funds of funds CHF 100’000 Yes
Direct investment in a business CHF 1 million No
Buying employer stock options CHF 10’000 Yes
Investment via the private equity secondary market CHF 1 million No
Indirect investment through networks CHF 300 per month or CHF 10’000 Yes

Funds

  • 1. Private equity funds

    Private equity funds are closed-end pools of capital managed by investment professionals aiming to achieve high returns by investing in promising companies. These funds generally have a fixed investment horizon, after which the PE fund plans to exit profitably through strategies like initial public offerings (IPOs) or selling to another company. The time horizon, management, structure, and fees are set out in their Limited Partnership Agreement.

    The primary sources of capital for PE funds are institutional funds and accredited investors, who provide substantial long-term investments. The chart below illustrates the structure and sources of capital of PE funds.

     

    Private equity funds structure
    Source: National Conference on Public Employee Retirement Systems

    Investors benefit from the expertise and scale of these funds, which offer professional management, reducing the need for extensive due diligence. Additionally, PE funds exert significant control over the companies they invest in, offering investors the benefit of comprehensive due diligence.

    However, this expertise comes at the cost of high fees, often including withholding fees, management fees, and performance fees, all of which can significantly reduce overall returns.

    Among other notable drawbacks are the high minimum investment thresholds, ranging from CHF 250’000 to CHF 25 million or even more, which can bar many from entering and limit diversification for the few who meet the minimum commitment. Investments are typically locked in for fixed terms, often ten years or longer, during which investors cannot sell any portion of their investment.

  • 2. Funds of funds

    Funds of funds (FOF) are investment vehicles that pool capital to invest in a portfolio composed of shares of other funds rather than directly in shares, bonds, or other assets. Also known as multi-manager investments, FOFs provide small investors with broad diversification, potentially protecting their investments from hefty losses caused by factors such as inflation and counterparty default.

    FOFs typically invest in mutual funds or hedge funds, depending on the manager’s expertise. They’re classified as either “fettered,” meaning they are limited to funds managed by the FOF’s managing company, or “unfettered,” meaning they can invest in funds across the market. The chart below illustrates the structure and sources of capital of FOFs.

     

     

    Fund of funds structure
    Source: National Conference on Public Employee Retirement Systems

    The primary advantage of FOFs is their ability to provide extensive diversification by spreading investments across a variety of underlying funds, each focusing on different asset classes, sectors, or strategies. Another advantage is that FOFs are managed by professional investment teams that are skilled in asset allocation and fund selection, allowing investors to take a back seat in a more passive role.

    All of this being said, FOFs also have notable drawbacks. The minimum investment amounts for publicly traded FOFs are still around CHF 100’000, making them less accessible to mass affluent investors. On top of that, the fees associated with FOFs are high, seeing as investors are charged management fees for the FOF itself and its underlying funds. These fees can quite notably reduce overall returns, as well as the net performance of the investment.

Individual Deals

  • 1. Direct investment in a business

    Some investors discover a company through friends or their investment network and invest directly in a part of that company. This usually comes with a feeling of ownership that investing in a managed fund simply can’t provide. However, if you decide to embark on this journey, it’s crucial to surround yourself with good legal and financial advisors to help you through the acquisition process and other key company events. This option, therefore, requires a certain level of investing experience.

  • 2. Buying employer stock options

    Investing in individual deals can take various forms. Buying employer stock options through private equity marketplaces like Equitybee is one of them. Such marketplaces connect company employees with accredited investors, allowing them to buy and sell employee stock options.

    These options are often available at a discount to the market rate, making them an attractive investment. Nevertheless, investors should be aware that they do not own the shares outright, even after a liquidation event, which limits their control and their rights. Plus, the platform requires a high minimum investment, typically around USD 10’000, and may involve substantial fees.

  • 3. Investment via the private equity secondary market

    Private equity secondaries involve an investor buying an asset from another investor, whereas primary investments are direct acquisitions of stakes in private companies, such as in a buy-out or growth funding round. The chart below illustrates the scheme of secondary transaction steps and its participants.

     

    Secondary transaction steps and participants’ scheme
    Source: Chartered Alternative Investment Analyst (CAIA)

    Secondary investments can often be acquired at a significant discount, reducing the blind pool risk typically associated with primary investments. This allows investors to know what they’re purchasing and conduct due diligence, leading to more accurate predictions about future performance.

    Private equity investments, however, can remain inherently illiquid due to difficulties in finding a buyer for the assets, seeing as the required minimum initial commitment is typically CHF 1 million or more, making early exit challenging. Another struggle is that valuing companies in the secondary market can be complex, and the actual asset value may differ from the paid price. Additionally, cash flows in the secondary market depend on distributions, so it's crucial to select experienced managers with a proven track record in navigating market cycles and protecting against downturns.

  • 4. Indirect investment through networks

    Another approach is buying a private company stake through investment networks like Moonshot. As a global investment network, we offer exclusive private equity deals, venture capital, real estate, and more for our members to access with as little as a CHF 10’000 one-off or CHF 300 monthly via the subscription model.

    For instance, OpenAI investors who got in through Moonshot back in February 2023 have already made a staggering 3.3x return on their investment as of July 2024. This performance stands to become even more impressive as the company continues to grow but remains private, reinvesting profits in the further development of its products.

    Within the Moonshot network, investors gain access to promising companies based both in Switzerland and across the globe. Swiss-headquartered companies in the network include Climeworks, Breitling, Synhelion, Piëch Automotive, Le Bijou, and Amēa Villas. Moreover, Moonshot announces new deals every month, meaning every investor has access to promising private companies from various sectors, including AI, cleantech, tangible assets, and many more.

    Availability of early liquidity is one of the most prominent advantages of our community compared to the previous options of individual deals. Every investor can express interest in selling their securities to other investors within the Moonshot Circle via the bulletin board*.

    * Please note that liquidity is neither provided nor guaranteed. Should match-making not be successful, investors can revise their offer and start the process from scratch (according to the product’s terms).

    Last but not least is the opportunity to be a part of the Moonshot community. Our members enjoy communicating with other like-minded investors during exclusive networking events, discovering new opportunities during presentations, and learning valuable insights about the investment landscape, as well as other benefits. In a nutshell, Moonshot offers a more accessible entry point for people interested in private equity investments, all while promoting community engagement and learning opportunities.

When selecting a PE investment vehicle, investors should consider their investment objectives, risk tolerance, liquidity needs, and available capital. If interested in investing in specific industries, like AI or cleantech, they should identify companies that provide such opportunities and perform thorough due diligence. Evaluating the company's track record and the credibility of the platform or fund they are investing through are also critical factors to consider before investing.

Final Thoughts

With all its benefits, private equity has become an increasing cornerstone of the portfolios of UHNWIs. Fortunately, aspiring investors can also take advantage of this. Private equity funds and platforms are making investment in private equity more accessible. Yet, as is the case with any investment, many factors need to be considered in order to ensure that your money is protected and brings you closer to achieving your financial goals.

Details  Start InvestingInvest  Book CallCall  Join NowApply  Share 
Overview  Portfolio  Benefits 
Share Moonshot and earn 2% reward

Invite your network to discover our exclusive private market investments, such as Synhelion or SpaceX, and earn lucrative rewards. If you share Moonshot as a logged-in user, you automatically make 2% (and up to 5% with our ambassador program) on your referral's first investment.

Copy sharing link Copy sharing text Share via WhatsApp Share via Email