DAI’S TAKE: WEALTHY INVESTORS EMBRACE LESSONS LEARNED FROM 2008

ByShasha Dai

Some wealthy investors appear to be good students, when it comes to learning from past mistakes.

Although high-net worth individuals and their family offices have invested in private equity for ages, many found themselves strapped for liquidity and unable to honor capital commitments after the 2008 financial meltdown.

Today, however, they are taking steps to avoid the pitfalls of the past, according to a survey from TIGER 21, a 410 member network of entrepreneurs and former executives.

As we reported in this morning’s newsletter, TIGER 21 Members continued to move money into private equity from other asset classes, including public equity. However, even as they do so, Members remain “hugely aware” of the risk of private equity, said TIGER 21’s founder and chairman Michael W. Sonnenfeldt.

Although private equity accounts for about 23% of the total assets held by TIGER 21 Members, the investors keep about one third of their capital in other, more-liquid asset classes, such as cash and public equity– “precisely because of the problem of liquidity,” said Mr. Sonnenfeldt. The more-liquid asset classes present a relatively steady source of cash, when and if, the investors need it to meet capital requirements for their private equity investments.

Meanwhile, only about 20% the Member’s private equity investments are in the form of fund commitments, which typically entail periodic capital calls and put greater pressure on liquidity needs when times get tough. The remaining 80% consist of direct investments in companies, either in the form of control or minority stakes.

Investors constantly need to balance a desire to achieve higher returns and a need for adequate liquidity. For now, at least one group of investors say they have found the right formula.

http://www.wsj.com/articles/dais-take-wealthy-investors-embrace-lessons-learned-from-2008-1461672001