Key Wealth Matters Podcast — Private Investments: What are they and how do they Impact your Plan?

February 2021

[Gary] Welcome everyone to the next episode of our podcast series, focusing on various wealth issues and opportunities with advice tailored to today's events. My name is Gary Poth, and I lead our family wealth business here at KeyBank. And today's topic is focused on private investment strategies. Joining me today for our discussion are two of our experts, Greg Dienna, who is the director of investment consulting for our Northeast region. And Joe Stone, who's the director of investment consulting for the Southeast region. So, here's just a little bit of background about both. Greg is a graduate of the University of Delaware. He holds the CFA designation. He's got more than 20 years of experience advising our ultra-high-net-worth families on both traditional and alternative investments. And prior to joining Key Family Wealth, Greg held senior positions at U.S. Trust, Wells Fargo, and JP Morgan. Joe's a graduate of Marshall University. He also holds an MBA from Wake Forest and also the CIMA[[reg]], CFP[[reg]], CTFA designations. And Joe's got well over 20 years’ experience as well with our families. So welcome, Greg and Joe. So, before we dive into today's topic, guys, I just want to mention as a backdrop to our families listening that we are one of the largest and oldest family offices in the country. We serve about 250 families across our three offices, and we also manage about $14 billion on their behalf. So, with that, let's frame-up today's topic. I get three questions for you guys when it comes to private investments. First, what is it and related, why should clients care? And then second, let's talk about the benefits of private investments. And then third, let's talk about the considerations or things that clients should be aware of before jumping into private investments—and maybe related to that under the considerations if you guys have a viewpoint of how today's environment is impacting the attractiveness of that asset class or those asset classes as well. So, let's start with what is private investments? And why should our clients care? And I'm going to throw that question out to both of you guys.

[Greg] So Gary, yeah, I'll start but know we think about private investments as investment strategies that have different risk and return characteristics than traditional stocks and bonds. And that can include asset classes like private equity, and there are different types of private equity strategies as well as private credit where firms are making loans to small to medium-size private businesses. Joe, I don't know if you want to cover any other strategies within the private investment space.

[Joe] Sure, any private equity, the two big ones, of course, are venture capital and buyout. Venture capital we're going to invest in the early stages of companies that have strong growth prospects. A buyout is where we come in and buy an entire company, the goals to improve the operations and financials and later sell it at a higher price. And I think there's also private real estate that exists that there's access to.

[Greg] I'd say to one other asset class or strategy that within private investments or hedge funds and that's, hedge funds it's kind of a catchall category. It can mean a lot of different things. But the way we think about hedge funds are primarily as diversifiers and adding uncorrelated returns to client's portfolios. In the past, fixed income used to play that role. In the current environment, with rates so low, we're finding it difficult to find good opportunities in fixed income. So, hedge funds to us can play the role that fixed income supplies, which is a steady return and providing balanced when there's some volatility in the equity markets.

[Gary] Got it. So maybe for this discussion, let's focus on both private equity and a discussion around hedge funds as well. So, anything else that the two of you would like to talk about in terms of the asset class, and if not, maybe we can move on to why clients should care about this.

[Joe] May I interject for just a second, Gary, what an area that we're also seeing private funds offering publicly traded securities. We've seen it in the equity space and the municipal space. The municipal space works very well because if you're investing in municipals through a mutual fund or through a separately managed account. Every day that's portfolio managers, a forced buyer, and seller. And I think we all know that if we're forced to buy or forced to sell something, we may accept prices that are not optimal. In an LP structure, it allows the manager to know what the cash flows coming in and coming out are with a great deal of certainty. So, they're never in that position where they have to be a forced buyer or forced sellers. So, we're extending what we're saying that private investments go beyond private equity, private credit, private real estate to actually those structures picking up publicly traded investments also, which is another opportunity.

[Gary] Yeah, good point Joe. Let's talk about why clients should care and what are the benefits?

[Joe] The first thing that jumps out are the returns from private equity. And if we look at some data from Cambridge associates that goes till December of 2018, the private equity over the last ten years versus the SEP is added a little over 1%. We look a little longer and go out 20 years. That number goes to 5%, and over 30 years, that goes to 12. So, the returns have been there, and I'll let Greg talk a little bit about the risk-adjusted returns and how the diversification benefit comes in.

[Greg] Yeah, but I think the diversification benefit certainly comes in as a result of the environment that we're in right now with very low fixed income yields, and low return is expected going forward from that part of your portfolio. So, in a traditional 60, 40 kinds of allocation that 40% fixed income with the 10-year treasury, trading at around 0.8%, it doesn't give you a lot of return expectations going forward. So, we think these strategies can play a role in that part of your portfolio which has traditionally invested in fixed income, and substitute some very solid returns for that part of your portfolio.

[Gary] And it, when it comes to returns, there's a wide dispersion and a wide variance among the different managers in private equity and in hedge funds. Maybe you guys can just talk a little bit about that help our clients understand why this asset class not only is so important but also maybe just some areas of maybe not a concern is the right word, but you got to be careful, right? When you jump into private investments, and you really got to know what you're doing. So maybe you can just talk a little bit about the different types of managers and the dispersion of returns.

[Joe] Yeah, Gary, on that point, what we study the past returns of venture capital and bio what we find is the persistence of strong performers, or in the top core tile type performance, they tend to stay in the top core tile. So, they have autocorrelated returns, good returns, you're followed by good returns. And conversely, those that are in the bottom half or bottom core tile tend to stay that way. So, when we are looking for private equity investments, especially in the venture capital and the buyout space, we want to focus on those strategies that have had the consistency and the persistence of returns over time, those tend to be better performers in the future very pronounced in venture and somewhat in bio.

[Gary] I don't know if you know this Greg or Joe, but if you look across the universe of private managers in this space, how many people are we talking about? How many managers are out there? Is it hundreds, thousands?

[Greg] Research has estimated with the fact that there are about 8,000 firms or so globally that specialize in private equity investments managing over $7 trillion. So that's that ranges that can be a small kind of one or two-person shop or a big diversified investment firm in globally speaking. So, a wide range of types of firms, investing in a wide range of strategies.

[Gary] Yeah, so that begs the question; just back to Joe's point around past success actually, in this case, predicts future success. How do we help a client shift through that universe of managers? And that's a lot of managers, and I would assume in that group you've got a lot of really good ones that clients would love to have access to, but you also have some ones that they should absolutely stay away from. So maybe just spend a minute or two talking about how we think about evaluating those managers and our due diligence process.

[Greg] It really begins with how we approach this business and how we approach relationships with clients and being on the same side of the table as our clients at; since we're held to the fiduciary standard, we have to make decisions that are in our client's best interest. And many of the broker-dealer competitors in this space charge firms a fee to be on their platform and offer to their clients. So, as you would imagine, not every firm is willing to pay a fee to a big broker-dealer to be on their platform. And so new clients who that broker-dealer don't see necessarily the best managers, they just see the managers that are willing to pay for access. And because we are held to a fiduciary standard or businesses about minimizing conflicts of interest and providing the best provider strategies that we can find, we are not beholden to those kinds of fee arrangements that might provide a worse outcome to our clients by narrowing the universe of managers that were willing or willing to provide these services to our clients.

[Gary] Makes sense. Joe, anything you'd like to add to that?

[Joe] Yeah, to expand on that, as we had mentioned, the autocorrelation of returns or the consistency of returns, how do you identify that? You identify that through the data, but you also identify that through relationships and being a Family Wealth Group that has a long history of dealing with endowments foundations institutions, and taking those concepts and moving those into the ultra-high net worth or the family wealth space, the relationships that Key has developed over the years with some of these leading VC firms or buyout firms, will allow us to have that type of access and that type of relationship, where we can offer these to a broader subset of our Key Family Wealth clients and family.

[Gary] Got it. So, access an unbiased approach to evaluating the managers should be critical for our families. Let's talk a little bit more about other benefits that our clients should be thinking about in this space, and then we're going to move on to some considerations. So, anything else that comes to mind that clients should be aware of when it comes to the benefits? We've talked a little bit about diversification, about enhanced returns. What about on the hedge fund side? Make your best case for why clients should be considering hedge funds?

[Greg] Yeah, Gary, I'll take that one. The hedge fund space again is a very broad-- it's a very broad name for strategies that just basically do things that are different than just buying stocks and buying bonds. If we use hedge funds as diversifiers and funds that will provide a steady return similar to what fixed income has provided in the past, but it can no longer do because rates are at such low levels. So, we think by investing in a diversified portfolio of hedge fund strategies, we can replicate the kind of steady returns that fixed income has historically provided, again as balanced for the portfolio when there's a significant amount of equity volatility.

[Gary] Yeah, it makes sense. I think hedge funds have gotten a poor reputation, if you will, over the last decade or so, as compared to, say, private equity, but what I'm hearing from you nevertheless, right? It is an important part of a client portfolio. Hedge funds perform well in the environment in which they're intended. To be that a hedge of risk and should still be considered a meaningful part of a client's portfolio. Did I get that right?

[Greg] Yeah, this is where our due diligence and our relationships are so helpful. There's certainly headlines from time to time that a notable hedge fund strategy that performs very poorly or has a really bad outcome. We've been fortunate to not experience that and really use them for what they're intended, which is to hedge diversify the risk of your equity exposure.

[Gary] Got it. How about any other considerations as we look to wrap up this podcast that clients should be aware of?

[Joe] I would say one thing, Gary, as we look at the publicly traded market throughout the years, We've seen a reduction in the number of publicly traded companies, which gives opportunities more towards the private market. To put that in perspective, there were 3,600 companies in the U.S. today. That's about half as many as there were out in 1996. And that's three-quarters of the number that we had in 1976. So, the private markets are becoming larger at the expense of the public markets. Now there's still plenty of opportunity there because if we look at domestic mutual funds, they manage about 8.4 trillion. If we look at buyout funds, they manage about 1.4 trillion. Venture they're going to manage about 455 billion. So, if you look at the entire equity capitalization of the U.S. stock market today, it's 20 times the size of the assets under management for bio funds and more than 80 times the size of venture capital funds. So, although there has been a large movement for companies to go from public to private, there's still a considerable opportunity in the private markets.

[Gary] Makes sense.

[Joe] I'd also say just some considerations for clients as they think about this space is, many times private equity and private credit partnerships can be a liquid as which makes sense. You know, private equity firm is investing equity capital into small companies. And as you would imagine, it's not so easy to get it back right away. So really, earmarking an appropriate part of your portfolio for these illiquid investments that can be invested in these companies for over ten years is a primary consideration when you're thinking about these kinds of strategies.

[Gary] So just putting all of that together, the private investment market relative to the public continues to grow in size; the public opportunities continue to shrink. So that just means that clients are going to have to be more in tune with the private equity and private investment opportunities. There's a wide dispersion of performance among the private investment managers that clients are going to need help with. The return profile of private investment is very important, especially as the capital market assumptions of the public outlook public markets continue to decline. And so, all of that means that our clients should be considering private investments. If they don't already have it as a meaningful part of their portfolio, obviously, Greg, you, and Joe have described the opportunity well but also some of the considerations and risks and all the more reason why our clients need to help of unbiased experts like Greg and Joe. So, with that, let me close this podcast by thanking you, our client, for trusting Key to help you grow your business. And also, for trusting Key Family Wealth to serve as your personal advisor on all aspects of wealth management. We know that you've got a lot of different choices out there when it comes to banking and wealth management. I can assure you that this team, including Greg and Joe, wake up every day, thinking about how to better serve you and better serve your family. So, with that, we'll conclude this podcast, and we want to wish you and your family a happy and safe fall season.

The headlines have been undeniable. "Market reaches new record highs, despite pandemic," and other similarly sensationalized headlines have underscored the massive investment seen in a variety of markets – but this trend has been especially true for private equity and investment.

According to a 2020 Deloitte report on private equity, growth is still anticipated in private equity, with a forecast of global private equity assets under management (AUM) to reach $5.8 trillion by 2025. They also reported the reinforcement of supportive relationships between private equity and their portfolios, with many firms stepping in to support their portfolio companies through recent challenges.1

So, where do things stand now with Private Equity, and how can investors take advantage of opportunities as they arise?

Listen in as Gary Poth is joined by Key Family Wealth Directors of Investment Consulting Greg Dienna and Joe Stone, as they discuss the state of private investment opportunities with an emphasis on defining these various opportunities and the unique considerations for each. Tune in to this latest edition of the Key Wealth Matters Podcast as our team outlines where private equity, hedge funds, and venture capital fit into a family portfolio and what to look for when evaluating investment managers in this space.


Patrick Henry, Frank Fumai, Tania Lynn Taylor, Jagat Patel, Deloitte. "The growing private equity market." 5, November 2020. URL: