Recent Release | 20 Apr 2022
Geographic Diversification in Private Equity Markets
Innes McFee
CEO
Investors in private markets can benefit from geographic diversification to help minimize their specific market downside risks, to participate in global economic growth, as well as to reduce their exposure to inflation risks and stretched valuations. Investors are starting to take notice, with allocations to traditional U.S. based private markets showing signs of decline.
The Beneficient Company Group, L.P. (Ben) uses its Total Portfolio Management (TPM) framework and private market risk/return forecasts to illustrate the potential diversification benefits to investors. Three broad themes emerge from allocation analysis over the next five years. First, our analysis makes a clear case for geographical diversification in private equity markets, showing that it can help to deliver higher risk-adjusted returns compared to a domestic-focused portfolio. Second, we see an increased exposure to Asia as a key consideration for most investors. Third, our bear scenario analysis illustrates that a simple shift of allocation toward advanced European economies can help mitigate key inflation risks while maintaining a high level of risk-adjusted returns.
Foreign Exchange (FX) risk represents a significant hurdle to investing outside the U.S. The dollar can move in long swings that magnify non-dollar returns and add substantially to their downside risk. The outlook for the dollar remains highly uncertain. Although it is strong on an historical basis and relative to some fundamental anchors, its ongoing position as the reserve currency and the depth of its capital markets are important supportive factors.
The potential for an extended bout of inflation also supports the case for diversification. Inflation risks are higher in the U.S. than elsewhere in the global economy, given the speed of the recovery, and could lead to different correlation structures between asset classes. In that environment, greater geographical diversification could help investors pursue their financial goals while minimizing their downside risk.
About the team
Our Macro & Investor Services team are world leaders in quantitative economic analysis, working with clients around the globe and across sectors to build models, forecast markets and evaluate interventions using state-of-the art techniques. Lead consultants on this project were:
Innes McFee
CEO
Innes McFee
CEO
London, United Kingdom
Innes McFee is the Chief Executive Officer and Chief Economist of Oxford Economics, based in London. Innes is responsible for coordinating and managing Oxford Economics’ global economic analysis, forecasting and consultancy activities, and overseeing its global team of over 450 professionals including 300 economists and analysts. Innes has worked in the Macroeconomic Consulting and the Macro & Investor Services teams since joining Oxford Economics in 2017. Most recently he has led the growth in Oxford Economics’ subscription business writing and presenting to clients globally on macroeconomic, investment strategy and real estate issues.
Innes joined Oxford Economics after 6 years at Lloyds Banking Group as a Senior Economist, where he was responsible forecasts and analysis of the UK and international economy. Prior to joining Lloyds Innes was an Economic Advisor at HM Treasury. Innes has a first-class undergraduate degree in Economics from the University of Durham and an MSc in Economics from Warwick University.
Adam Slater
Lead Economist
Adam Slater
Lead Economist
Oxford, United Kingdom
Adam Slater is a lead economist at Oxford Economics, responsible for contributing to and helping to communicate Oxford Economics’ global macroeconomic view, including writing for and helping edit regular publications. He has a particular interest in developments in financial markets. Before joining Oxford Economics, Adam spent more than ten years working as an economist and strategist in the City of London for Nomura, Rabobank, and Calyon.
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