Private Equity
Definition
Private equity (PE) refers to investments made in privately held companies, those not listed on public stock exchanges. These investments are typically made through funds managed by private equity firms, which raise capital from institutional investors and high-net-worth individuals. The goal is to improve business performance and ultimately exit through a sale, IPO, or recapitalization at a profit.
PE includes strategies such as leveraged buyouts (LBOs), growth capital, venture capital, and distressed investing.
Why It Matters to Investors
- Offers the potential for high returns through active ownership
- Access to early-stage or transformational growth opportunities
- Long investment horizons can align with long-term capital goals
- Often considered part of an "alternative" asset allocation
- Comes with substantial risks, including illiquidity, valuation uncertainty, and high fees
The TiltFolio View
Neither TiltFolio system is involved in private equity investing. Both strategies are designed around liquid, transparent ETFs that allow for systematic rebalancing, something incompatible with the long lock-up periods and opaque valuations typical in private markets.
While private equity is often marketed as a source of superior returns with low volatility, this portrayal can be misleading. Volatility may appear lower simply because the assets are not priced daily. Moreover, when liquidity is urgently needed, such as in financial crises, private equity positions may need to be sold at steep discounts. Notably, both Harvard and Yale have recently attempted to offload parts of their PE portfolios at significant losses to book value, revealing the practical limits of the illiquidity premium.
Both TiltFolio systems prefer the flexibility to adapt rapidly across asset classes. TiltFolio Adaptive requires monthly rebalancing for its dynamic approach, while TiltFolio Balanced needs annual rebalancing for its diversified allocation. That adaptability is lost in illiquid private equity positions, regardless of potential upside.
Real-World Application
• A venture capital firm invests in early-stage startups with the hope of future IPOs
• A pension fund allocates 10% of its capital to PE buyout funds
• An endowment struggles to rebalance during a downturn due to capital being tied up in PE