SMSFs face significant challenges when it comes to investing in private equity, especially compared with the relative ease of accessing public equity markets, a leading financial specialist has warned.
Michael Dwyer, private wealth adviser for Shadforth Financial Group, told SMSF Adviser that traditional private equity funds, including venture capital, growth capital, and buyout funds, typically require substantial minimum investment commitments and long investment time frames with minimal liquidity.
“The minimum investment can often range from hundreds of thousands to millions of dollars, effectively excluding the vast majority of SMSFs, whose total fund balance may not reach the minimum threshold for a single investment,” he said.
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“Capital is typically locked up for long periods, often 7-10 years or more, with limited opportunities to sell or redeem the investment before the fund matures or exits its investments.”
In private equity, fees can also be higher than many other investment options, so any potential return performance needs to be considered in light of additional fee drag.
“Valuing unlisted companies is also inherently complex, subjective, and infrequent. Under the Superannuation Industry (Supervision) Act (SIS Act), SMSF assets must generally be reported at market value.”
“Obtaining regular, reliable, and independent valuations for PE investments that satisfy auditors and the ATO can be difficult and costly. “
It is important to note that evaluating private equity opportunities requires significant specialist expertise and resources.
“Trustees need to assess the quality of the private equity fund manager, understand complex fund structures and fee arrangements, including management fees and carried interest/performance fees, analyse the underlying unlisted companies and review lengthy legal documents,” Dwyer said.
“Additionally, the investment strategy of the SMSF, which would be designed with the member profile and needs of members in mind, would need to support any allocation to private equity. This must be assessed based on the individual investing and liquidity needs of the member profile.”
Dwyer said a global economic slowdown triggered by trade wars affects nearly all asset classes, though in different ways and at different times.
“However, it’s important to note that superannuation is a long-term investment and SMSFs should stay focused on long-term financial goals rather than short-term market fluctuations,” he said.
“For SMSFs, the potential fallout from US tariffs and broader trade tensions is a valid concern, just as it is for large APRA-regulated super funds. Many SMSFs have historically favoured Australian shares, property and cash, with lower exposure to international equities, however, this is gradually changing.”
Furthermore, he said SMSFs are increasingly holding greater international exposure, particularly in areas like US equities, through investment vehicles such as ETFs, as well as direct stocks.
“When considering international exposure, it is important that investments don’t become too concentrated as this can increase risk, particularly when the market is more volatile,” he said.
“In these times of market volatility, it’s important to take a long-term view. If a trustee had recently switched from cash, they are likely to be unsettled by the recent downturn and potential for volatility, however, long-term investors in quality international stocks have seen strong returns for over a decade.”
However, putting it into perspective, he said, even the recent downturn means that most trustees and members are likely to be better off having been invested in an appropriately diversified, quality portfolio, holding a range of asset classes.
“For investors, it is often about time in the market, rather than timing the market.”
