Behind the impressive growth of the sector's assets has been a consistent track record for bettering equity markets. Over the past two decades, these returns have attracted increasing capital inflows from large institutional investors, such as public pension funds, and now from high-net-worth individuals.

A private equity fund is traditionally set up as a legal partnership under which investors buy in as 'limited partners' with a substantial financial commitment, consisting of an initial investment and an obligation to make further investments when the fund made cash calls to finance new investment opportunities over a three- to 14-year duration.

Interest in private equity has grown in the past few years so private banks have set up feeder funds which allow high-net-worth clients to make smaller investments in private equity. While a limited partnership requires a minimum investment of between US$10 million and US$25 million, feeder funds set up by private banks accept as little as US$250,000. This has allowed more high-net-worth investors to participate and spread their risk across a greater number of funds.

According to Anuj Khanna, managing director and head of private banking in North Asia for Credit Suisse, private banks have also added value to the investment process by screening funds for their clients.

'This ensures that the selected [private equity funds] pass muster in terms of investment management process, accessibility of managers [to investors], ease of monitoring and other essential matters pertaining to providing our clients with continuity and transparency of what happens to their investments,' Mr Khanna says.

For private equity firms in search of capital, feeder funds established by private banks have proven a boon. Marcus Thompson, chief investment officer, HSBC Private Equity (Asia), says: 'A significant portion of the funds being deployed in private equity now comes from high-net-worth investors.' He says HSBC Group's private banking operations have been a significant source of funding for HSBC Private Equity funds.

'Our private bank operation will set up a feeder fund to make the commitment to the private equity fund we manage, and service the relationships with individual high-net-worth investors. This arrangement works well for us because with the feeder fund acting on behalf of many clients, we can get a quick response to a draw down notice,' Mr Thompson says.

Proof that the model is successful comes from Kenneth Ho, Julius Baer's head of products in Asia-Pacific, who says business in such private equity products has grown exponentially in the past two or three years.

'Ultra high-net-worth clients, who have US$30 million or more to invest, have always been active in private equity. What we are seeing now is increasing demand from high-net-worth clients with between US$1 million and US$30 million to invest.

'This is where the exponential growth is coming from,' Mr Ho says.

In addition to greater demand for private equity, Mr Ho says, clients are getting experienced in the technical aspects of assessing private equity performance.

'We find our Greater China clients already have a good understanding of the risk involved even if they have not invested in private equity before, because they usually have experience investing in ventures or projects on their own with similar risk profiles. What has changed perhaps is the level of technical knowledge. Clients have developed a better understanding of private equity performance using metrics, such as the J-curve, weighted average cost of capital and internal rate of return,' Mr Ho says.

Martin Dunnett, global head of private equity at UBS Wealth Management, said in his experience, knowledge and understanding of private equity varies among high-net-worth individuals and clients who had not fully appreciated the intricacies of private equity had, in many cases, ended up dissatisfied with their investments.

'One of the figures about private equity which impresses uninitiated clients is the average yearly return of almost 14 per cent made by private equity funds in the past 20 years. Many inexperienced investors are happy to take that return because it would allow them to mathematically beat the stock market. But we would argue that, in reality, 14 per cent is not an adequate reward for the risk and illiquidity involved,' Mr Dunnett says.

One of the idiosyncrasies of the private equity industry is the wide range in performance among funds.

Unlike equity mutual funds, where historically there has been a 10 percentage point difference in returns, or bond funds where there has been a 4 percentage point difference in returns, the difference in returns between the top and bottom quartiles of private equity funds has been measured at 58 percentage points over a 10-year period.

Mr Dunnett believes private investors should aim to gain exposure to the top quartile of private equity funds, where returns have averaged 33 per cent per annum over the past 20 years.

The challenge for high-net-worth investors is in finding a way into such top performing private equity funds which, in many cases, have been far less accessible than newer funds. 'Best-in-class funds do not necessarily need to go into the market to raise money [like new and less established funds] ... If a private equity fund is a top performer it can rely on its existing investors to reinvest whenever it needs to raise cash.

'For example, there is a cadre of around 50 venture capital funds, which consistently make very high returns. These funds are in a virtuous cycle. They have the most experienced and talented managers who attract the most promising ventures because they have the best reputation.

'This allows the funds to generate the best returns, which ensure the managers remain successful. Unfortunately, none of these funds are open to new investors,' Mr Dunnett says.

For high-net-worth investors seeking a way into these best-in-class venture capital and buyout funds, Mr Dunnett believes UBS Wealth Management has a unique proposition.

The bank offers high-net-worth clients exposure to the top quartile of private equity funds through a highly rated fund of funds which, Mr Dunnett claims, other private banks do not have access to and is closed to new investors.

'We start clients off on this core funds-of-funds programme because it contains a well diversified portfolio of around 100 private equity funds across four different vintages. Then, if the clients want more specific investment exposure, we have baskets of funds in single vintages,' Mr Dunnett says.

As with other private banks, UBS also offers access to single-manager funds through feeder programmes.