WHAT MAKES PRIVATE EQUITY SO SPECIAL?
The year 2016 was a record breaking year for Private Equity Funds. 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».
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: