In Europe alone, they collected commitments of EUR 73.8 Bln, the highest value since 2008. The market is dominated by institutional investors. Merely 9% of inflows come from Family Offices and private investors¹.

Under the term “Private Equity“, a wide range of investment opportunities are found in practice. These can differ not only with respect to their legal form but also with respect to risk, return and costs.

“Private Equity“ is generally understood as an investment into non-listed companies. Depending on their specialisation, funds are investing in different development stages of companies (for example Venture, Buyout or Turnaround). Fund of funds or secondary funds offer additional opportunities for diversification.

We would like to describe some particularities of Private Equity to you:

Low correlation to liquid asset classes

Due to the low correlation with equities, the allocation to Private Equity shall result in a positive effect to the risk/reward ratio of the portfolio. But it is also the deferred and less frequent evaluation of Private Equity-assets, which has a dampening effect on the volatility. This effect is often not achieved by investments in “Listed-Private Equity“.

High returns

The returns of successful Private Equity-funds are in the long-term higher than the returns of funds of liquid asset classes. This premium should compensate the investor for the long-term capital commitment.

The following table shows the long-term returns of different strategies:

Grafiktabelle

Long-term capital commitment

Private Equity-funds are normally closed-end funds with a previously defined term (10 to 12 years) that can be extended by the manager subject to certain requirements. The investor commits him- or herself to investing a certain amount. Due to the typical capital calls and distributions, normally no more than 70% of the committed capital is tied up in the fund.

Higher entry threshold

Renowned and successful fund provider often require a substantial minimum commitment. This makes it difficult for private investors to have access to topfunds and to build-up a diversified portfolio.

Higher costs

The fees for Private Equity-funds are normally significantly higher than the ones for equity funds. Besides the management fee a performance-related fee (“carried interest“) is normally charged as well. The costs for selecting a top-tier manager are higher as well. The quality of the manager is finally the crucial success factor.

Conclusion

Investing in Private Equity requires expert knowledge and experience. The selection process (ManagerDue-Diligence) requires more time and costs as is the case with an investment in traditional asset classes. Private Equity-investments offer the opportunity to generate additional returns. Therefore, Private Equityinvestments can be interesting for certain investors, not only in the current market environment.

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¹ Invest Europe: 2016 European Private Equity Activity, July 2017