Justin Pollack, from PineBridge Investments with an impressive $168 Billion AUM, joined us on the latest episode of the 10X Capital Podcast. He shared a fascinating insight on why private equity has consistently outperformed the S&P 500. Hint: It’s not because it is a higher performing asset. The reason has to do with LEVERAGE. An investor is able to leverage private equity safely, while an investor may get completely wiped out if he or she was to leverage the S&P 500.
Here’s why:
In a scenario like the financial crisis or the COVID-induced market crash in 2020, owning indexes like the S&P or Nasdaq comes with the risk of margin calls when markets drop 30% or more. This can put investors on a rapid downward spiral. But with private equity, where you own a series of private businesses with heavy borrowing, there are no daily margin calls. This gives investors a longer time frame to manage the situation.
Another significant difference that Justin points out is the behavior of lenders. A broker will easily take back securities and flip them in seconds. But they don't want to take back a private business. This structural difference gives private equity a unique advantage in avoiding margin calls.
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