EXECUTIVE SUMMARY

Over the past 20 years, the value of inherited wealth in Switzerland has increased significantly, from CHF 37 billion in 2000 to CHF 95 billion in 2020. Relative to national income, this value has risen from 6 percent in 1975 to over 13.2 percent in 2020.

The sustained upward trend in the securities and real estate markets has led to most Swiss residents being more fortunate than their parents or grandparents, yet this perceived financial comfort has soothed many into a false sense of security. Notably, Swiss residents’ savings remain focused on listed securities, term deposits, bonds, and their homes. That approach has served them well up until recent times, as the valuations of almost all traditional asset classes reached unprecedented heights.

Now, with economic uncertainty, an increase in volatility, and excessive valuations, how can Swiss residents avoid suffering unnecessary losses to their inheritances? Take the world’s ultra-wealthy as an example. Approximately 81% of them adopt a strategy consisting of allocating a core part of their portfolios to private equity (27%), more than to real estate (11%), cash (9%), and fixed income (10%). However, only a small proportion of the ‘mass affluent’ invest in that particular asset class.

There are a number of reasons for this. First, the high minimum threshold limits the ability to invest on one hand, and on the other, an investor gathering the necessary funds to invest such an amount will not be able to diversify. Second, due diligence tends to be difficult when there is sparse media coverage or broker research into private markets. Third, the lack of liquidity reduces the potential interest for those investors with short investment horizons.

However, the advantages of private equity are attractive to all investors. For decades, these investments have secured the fortunes of ultra-wealthy individuals and family offices during public market downturns and throughout long periods of economic uncertainty.

The highest returns materialize before a company goes public, even if the risks tend to be similarly higher. Over the last decade, private equity outperformed listed equity by a staggering 208%. Furthermore, private equity offers 2.24x lower volatility compared to public equity, since there is zero liquidity during an economic downturn. Additionally, this limits the risk that investors suffer major losses driven by panic selling.

In any case, the risk-return ratio is better with private equity than with public equity. Another benefit of private equity is that it offers a broader variety of available industries and companies for investing. Furthermore, risk is often mitigated by the influence private equity investors usually have on company decision-making.

When considering whether (and how) mass affluent investors can access private equity, there are four avenues to be aware of. First, investing directly in private companies could yield higher returns, but investors are unlikely to be able to invest directly in private equity if they have less than CHF 25 million of available capital. The second option is private equity funds, which can offer better diversification. However, private equity funds tend to be closed-end with multi-year terms, resulting in a lack of liquidity. Also, investors may not know in advance what companies are included in a given portfolio. Furthermore, the minimum investment typically starts at CHF 100’000.

Listed funds seem to offer an accessible compromise for mass affluent investors seeking to invest in private equity. The advantages consist of not having a minimum investment, having shares that can be traded daily, and having a perpetually transparent value set by the quoted price. One disadvantage to be considered is the volatility, which is similar to the public markets, while the share price may diverge from the value of the underlying assets.

Finally, there has been a rise in ‘new wave’ investment platforms. Not only do these platforms offer all the typical benefits that flow from private equity, but they also have a lower minimum investment threshold, a secondary market for liquidity, and moderate fees. However, the downside is the variety of opportunities provided, which is much smaller compared to direct investment or funds.

In summary, investing in private equity, which has long been an essential tool in the prudent management of inheritances, is no longer the purview of the ultra-wealthy. With assistance from ‘new wave’ platforms, the majority of Swiss residents are able to access private equity securely and confidently.

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