THE ALLURE OF PRIVATE EQUITY

PENTATUESDAY, AUGUST 7, 2012 | By CHRISTIANA CEFALUThe Allure of Private EquityInsights and advice for families with assets of $5 million or more.When markets turn tricky, there’s a lot to be said for sticking to what you know.That’s why one network of ultra-wealthy investors has turned bullish on private-equity investments. Manymembers of the group, called TIGER 21 (profiled by Penta in May), made their fortunes by starting andgrowing their own businesses, so investing in private outfits is familiar turf. It’s the American Way and theylike it. “There’s a back to basics sense,” says Michael Sonnenfeldt, the group’s founder.The 190 members of the network increased their private-equity exposure to 18% of their collective portfoliosin the second quarter, up from 14% in the first quarter. It was the biggest increase among all assets held bythe group.TIGER 21‚Äìthe Investment Group for Enhanced Results in the 21st Century-represents a wide variety ofwealthy investors-tech mavens, real estate moguls, entertainment execs, you name it. As a group, theyhold $18 billion in assets, or an average of $95 million each. In monthly “Portfolio Defense” presentations,they critique and advise each other to make better, more strategic investment decisions. While few of uscan sit in on these high-stakes workshops, we can see where the chips land every quarter. We spoke withSonnenfeldt after the group recently released its second- quarterAsset Allocation Report.”We’re living in a time where it’s extremely difficult to predict investment trends,” says Sonnenfeldt. “Membersare extremely nervous about government policy, employment, Europe, and even China.” With interest ratesat rock-bottom levels, many members are cutting back on fixed-income investments. Those are down to13% of members’ total holdings, the lowest since TIGER 21 began tracking asset allocation. Cash and cashequivalents, meanwhile, have climbed to 13% of the portfolios, up a point since last quarter.The growing ardor for private equity echoes the findings from IPI’s (Institute for Private Investors) FamilyPerformance Tracking survey, which shows IPI families channel 22% into the sector, often through buying outfamily-owned businesses that lack a succession plan or the capital needed to grow.Tiger 21 members are taking a shine to “small companies that have growth potential or, to a lesser degree, inprivate equity funds, with a domain expertise they have,” Sonnenfeldt says. Generally members are soughtout to be key advisors along with being key startup investors.Over the breadth of members, most are looking to balance leveraged buyout, or LBO, investments withventure-capital plays. Within the 18% of assets in private equity, Sonnenfeldt guesses that a quarter to a thirdare venture, while buyouts comprise the rest. When we asked what kind of companies members are gettinginvolved with, Sonnenfeldt said the only discernible trend is that they are scalable, which often goes hand inhand with being Web-based or having potential to expand into the online realm. One member made good onan early investment in Groupon, for instance.In general, what kind of rewards could one reap from a private equity investment? It varies wildly of course,but Cambridge Associates’ U.S. Private Equity Index reads private equity returns for the first quarter this yearat 5.38% (no meaningful results have yet been released for the second quarter). These days, that’s not badat all.