Recent Release | 20 Apr 2022

Geographic Diversification in Private Equity Markets

Innes McFee

Managing Director of Macro and Investor Services

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.

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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: