Study Portends Bright Future for Private Equity in Self-Directed IRAs

Private Equity is still proving to be a compelling asset class for self-directed IRA investors – continuing to outstrip the general stock market. According to a recent report from Coller Capital, most investors – 62 percent – earned net investment returns of 11 to 15 percent from inception to this year.

That’s solid performance for this underappreciated asset class, though not quite as good as last year, when fully two-thirds of investors experienced returns in the same range.

Private equity is a popular alternative asset class among self-directed retirement investors – particularly those who don’t want to become landlords through a real estate IRA, or those who have particular expertise in one or more industries which gives them a competitive edge when it comes to investing their self-directed IRAs in private equity.

About 18 percent of investors reported annual private equity returns of 16 percent, measuring from inception to 2017. Again, that’s slightly lower than the 20 percent who reported private equity returns in the 16 percent-plus range last year.

About 19 percent of private equity investors have seen annualized returns from inception to 2017 across their entire private equity portfolios, but there were very few – just 1 percent – who saw returns of five percent or less. In contrast, in the Asia-Pacific region, about 35 percent of private equity firms experienced returns in the 6-10 percent range, and 17 percent of private equity market participants report that they experienced incomes of 5 percent or less.

Other findings

Among the study’s other major findings: Most private equity limited partners are concerned about high asset prices (90 percent). 60 percent see protectionism as a big threat to private equity returns.

Most private equity investment respondents see improving prospects, with the most favorable sentiment in the Asia-Pacific region: 52 percent of respondents see improved prospects in private equity in the region in 5-6 years, while only 7 percent expect things to get worse.

In the United States and Canada private equity market, about one in five private equity investors responding – 22 percent, expect things to get worse for PE investors over the next two or three years, while 24 percent expect things to improve. However, there’s a great deal more optimism when it comes to the longer-term outlook: Extend the time horizon out to 5-6 years, only 9 percent expect things to be worse, while 40 percent expect things to be better over that time period.

Interestingly, half of private equity limited partners believe there is much greater tax uncertainty in North America – roughly evenly divided between those who think the tax situation in the U.S. will get better and those who think it will get worse. Uncertainty is much less in Europe and in the Asia-Pacific region.

As for industry sectors, financial technology seems to be the leading the way in the private equity space, with 65 percent of private equity investors seeing investment opportunities increase in this industry. Only about four percent of private equity investors expect things to contract in the financial tech sector. However, indications are that private equity investors are becoming much more selective when it comes to Asia-pacific opportunities.

In credit investments, private equity investors are seeing solid opportunity in special situations, distressed debt, direct lending and mezzanine debt – each of which are popular asset classes among self-directed IRA lenders.

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