PE Pulse: RIAs' Clients Favor Growth Equity over Buyouts

Registered investment advisors are flocking to growth equity opportunities for their clients while traditional buyout investing has fallen out of favor, according to a new survey by alternative investments platform Crystal Capital Partners.

Registered investment advisors who include private equity in their clients' portfolios are more likely allocating to growth equity opportunities than more traditional buyouts, according to a new survey by alternative investments platform Crystal Capital Partners.

Most of the 45 independent advisory firms surveyed noted that only a "small" percentage of their clients were allocated to PE strategies, but growth equity, in which capital is provided to established companies through significant minority stakes to help them finance growth initiatives, is a "standout" among sub-strategies, the company said.

About 23% of advisors said that more than 50% of their clients were allocated to growth equity, which also commands the highest portion of current demand, with 38% of advisors noting their clients were very interested in it and 7% noting they were extremely interested, Crystal Capital said it found in its 2024 Private Equity Investment Outlook Survey, conducted between May 28 and July 2.

A Crystal Capital spokesperson told FA-IQ that the responding RIAs had between $500 million and $3 billion in assets under management, but that Crystal Capital does not have information on the underlying portfolio composition of the respondents' clients.

Growth equity's popularity has been boosted in part by clients' growing interest in artificial intelligence, infrastructure and software, according to Crystal Capital. Nearly 83% of advisors stated that clients were most interested in technology investments, followed by health care (66%), energy (29%), financial services (15%) and consumer goods (10%).

Respondents were least interested in buyouts, with 70% of advisors responding that less than 10% of their clients were allocated to the strategy and 38% of advisors stating that their clients were not interested in the strategy, the company said.

The current high interest-rate environment has been a "major contributor" to the decrease in buyout activity of late, with investors more interested in "add ons and platform builds," the company spokesperson said, noting that buyouts need to be financed and financing costs can significantly dent returns. The spokesperson also said that buyout deals continue to account for a larger share of capital deployed, given the scale of those transactions.

Meanwhile, just 10% of advisors have more than half of their clients allocated to secondaries, and 7% have more than half allocated to venture capital, with neither strategy attracting much more client demand, according to Crystal Capital.

Among the barriers to higher adoption of PE strategies is a considerable knowledge gap, the company said. More than one-quarter of advisors said their clients do not understand the differences between them, while 42% stated that lack of understanding or knowledge was a primary barrier to demand, according to Crystal Capital.

"Private equity is traditionally associated with buyout investing, and so it is interesting to note that financial advisors are reporting their clients actually have a preference for growth equity strategies, with their higher risk-return profile," Steven Brod, chief executive officer of Crystal Capital, said. "However, our survey also revealed that a large education gap still exists when it comes to understanding the different sub-strategies within the private equity market."

Other barriers to increased adoption were illiquidity concerns (75%), perceived higher risk (50%), and high investment minimums (22%), the company said.

Factors driving future demand, meanwhile, were largely the potential for high risk-adjusted returns (64%) and diversification benefits (62%). In terms of selection criteria, the track record of the fund manager (64%) outweighed other categories, including the fees and expenses (42%).