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The Endowment Model: Private Equity

by AOG Wealth Management

The objective of the endowment model is to provide competitive portfolio returns with reliable income while reducing the volatility of the portfolio. Two of the major characteristics of an endowment portfolio that work together to fulfill these objectives are the use of illiquid investment vehicles and the use of investment vehicles that are of very differing economic characteristics. Real estate, energy, private equity, private debt, stocks and bonds are so very different from one another in how they behave during certain economic cycles that they will rarely go up and down in value at the same time. It is the “non-complementary” nature of these asset classes that reduces the volatility of the portfolio.

Most of the asset categories mentioned previously generate some form of income just some more than others. Private equity, while having some investment opportunities that do provide income, most times is not geared to providing income.

Private equity returns are largely driven by strategic investments with the opportunity for significant growth. While investors must commit capital for a long period, the offsetting illiquidity premium provides the opportunity for returns in excess of the typical public markets.

While private equity valuations may tend to track public markets over time they do so without the same volatility as the public markets which helps minimize losses during stress periods. The most important distinction between public and private equity is that private investors are not simply passive investors. Private equity firms create a portfolio by purchasing significant interests in startups or established companies, then working to increase company value through internal reorganizations, enhanced operational efficiencies or external acquisitions. Value is usually realized through the sale of the company or an initial public offering.

We believe that private equity is an integral part of the endowment portfolio and we are glad to be able to provide a private equity investment option to our clients.

Securities offered through TD Ameritrade Institutional Services located at 5010 Wateridge Vista Dr., San Diego, California 92121-5775. Investment advisory services offered through AOG Wealth Management, Inc. AOG Wealth Management, Inc. is neither an affiliate nor subsidiary of TD Ameritrade Institutional Services.

There is no standard or exact definition of the Endowment Model. Portfolio design, specific investments and ultimately performance vary considerably among endowments and investors. There are material differences between the terms under which endowments and individuals can invest in alternative investments. Kalos does not claim that any investor will achieve the same result as any endowment, institution, or other investor. Kalos’ Investment Advisor Representatives have a conflict of interest when they recommend securities where they can earn a commission as Registered Representatives of Kalos Capital but do not earn both advisory fees and brokerage commissions on the same assets.

Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These assets can be highly illiquid and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Investment offerings in private equity can only be made on the basis of a confidential private placement memorandum or prospectus by the issuer. This ad does not constitute an offer of securities or a solicitation of an offer to buy securities.

Category: Asset Management, Wealth Management