Does Private Equity Belong in Your Client's Portfolio?


Faced with a slumping stock market and low-yield bond portfolios, some fund managers maybe tempted by the higher potential yields of private equity. Before leading clients to this option, advisers should ask some hard questions:

R Do you understand the deal? Is the specific industry one you believe you can get your arms around? Some investments, notably real estate and producing oil properties, may have simpler economics and more transparent balance sheets and disclosure than startups and technology companies.

R How good is the disclosure you have been offered? Has the company making the offer provided explanatory materials that make sense to you and your clients? Will you be able to cogently describe the offering so your clients will understand what you intend to put in the portfolio? Are legal counsel and accountants qualified to handle ERISA issues and unrelated business income tax?

R What will your clients receive in exchange for a partial allocation to nonmarketable assets? Your client should get something material in exchange for the risk. It could be the expectation of higher current yield; lower total cost of issuance than the combination of public offering costs and the high reporting costs of public companies; the belief you are recommending assets that will later be sold to a public company at a higher yield; or the ability to invest in a niche market where the adviser cannot find a surrogate public investment.

R Is this client an accredited investor? There is a reason private-equity holders should generally be accredited. The client may benefit from potentially lower costs of a private offering, but the offering will typically have undergone less regulatory scrutiny and an increased implied risk of loss. The client needs a large enough portfolio so unexpected short-term liquidity needs can be funded from other assets. In particular, real estate offerings may require holding an asset for five to eight years to get the maximum return.

R Are the sponsors reliable? What is the private-equity company’s reputation? What was the performance of its past transactions offered? If it’s real estate, physically look at properties the sponsor has brought to market through previous offerings. Assess how the properties are doing, their upkeep, and current ability to throw off income as expected, depending on occupancy and demographics of the area. For other asset classes such as oil and gas wells, look for disclosure backed by qualified accountants on how those transactions have performed.

R Will the private-equity company make an effort to help liquidate a position if events such as death or divorce require it? It is important to understand the process that the private- equity company has in place if a portion of the shares must be sold. Often a company offers the shares to other shareholders. Ask the company for data about the number of times shares needed to be sold and the disposition of the shares.

R Does the private-equity company provide periodic reports so the offering’s current value may be added to a client’s aggregated asset report? Many advisers are paid a percentage of clients’ listed assets under management. Will the adviser platforms with large brokerage firms be willing to list the offering so the adviser can be compensated?

R Is the adviser’s back office set up to handle private-equity investments? Review your compliance manual to ensure company procedures relating to treatment of this type of asset in a client’s portfolio are in place and consistent with professional standards and securities regulations.

—By Michael Dowd, senior vice president at Millennium Credit Markets LLC, a New York-based investment firm. He can be reached at


Get your clients ready for tax season

These year-end tax planning strategies address recent tax law changes enacted to help taxpayers deal with the pandemic, such as tax credits for sick leave and family leave and new rules for retirement plan distributions, as well as techniques for putting your clients in the best possible tax position.


Keeping you informed and prepared amid the coronavirus crisis

We’re gathering the latest news stories along with relevant columns, tips, podcasts, and videos on this page, along with curated items from our archives to help with uncertainty and disruption.