Private Equity Investments

[saluki9]

Great, but it is apples to oranges when comparing the mean variance characteristics of a publicly traded asset class. As such, making such comparisons is a little iffy, so I wouldn't want to have to stand on them. Same problem with hedge funds real estate, art, collectables, etc. Doesn't mean it is a bad choice/addition to a portfolio, just that I wouldn't want to have to mount a rigorous defense of the high return-low volatility claim.

Sorry, I didn't make myself clear. The data I have shows both mean returns AND volatility to be very high.

Didn't mean to imply high returns and low volatility

 

[ats5g]

Very intesting so far, by regarding my question. Does anyone here invest in these vehicles, and if you don't but have the assets to do so, why don't you?

The preliminary data I have seen suggest PE returns blow away publicly traded equities. Of course, the data set is very young and very small, and past returns do not guarantee future returns .

For a lot of the papers on private equity, you can search The Social Science Research Network. Downloading most papers is free, with free registration.

I found two recent papers that don't speak to highly of private equity.

Performance of Private Equity Funds:

Abstract:
Using a dataset of 1579 mature private equity funds, we find that performance estimates found in previous research and used as industry benchmark are overstated. We show that commonly used samples are biased towards better performing funds. We also show that accounting values reported by mature funds for non-exited investments are substantial and we provide evidence that they mostly represent living dead investments. After correcting for sample bias and overstated accounting values, average fund performance changes from slight overperformance to substantial underperformance of -3.83% per year with respect to the S&P 500. Assuming a typical fee structure, we find that gross-of-fees these funds outperform by 2.96% per year. We conclude that the stunning growth in the amount allocated to this asset class cannot be attributed to genuinely high past performance. We discuss several potentially misleading aspects of standard performance reporting and discuss some of the added benefits of investing in private equity funds as a first step towards an explanation for our results.

and Private Equity Performance: Returns, Persistence and Capital Flows

Abstract:
This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund in the market. At the industry level, we show that market entry in the private equity industry is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Aggregate industry returns are lower following a boom, but most of this effect is driven by the poor performance of new entrants, while the returns of established funds are much less affected by these industry cycles. Several of these results differ markedly from those for mutual funds.

Of course, these are only two out of probably hundreds.

I'd be more impressed to see the return to individual investors after all those lovely fund of fund fees. Also note that David Swenson of Yale, while recommending private equity for institutional investors [like endowments], doesn't recommend them for individual investors.

- Alec

 

[audreyh1]

I don't mean this as an insult, but you must not have read a lot of papers or books on MPT. Private equity is on all the EFs I've seen.

Many times for individuals it is left out of the optimization, but it's mean return and volatility #s blow away most other asset classes

You're right in that I haven't read published financial papers on the subject rather the stuff that's written for the individual investor, so I've never seen that class included in any optimization.

Also, is it practical to rebalance with a private equity fund? Can you add smaller amounts of money or take profits as you like? Is it really that liquid?

Audrey

 

[Nords]

I have just never seen "private equity" listed as one of the asset classes to include in the mix.
Audrey

The first place I saw it was in ESRBob's "Work Less, Live More" and I haven't seen it since (except in Money magazine's "Where to chase hot-money performance now!!" articles). Of course Bob's spent time with VCs and knows what he's talking about, although most beginning investors would be less comfortable with this. It's probably a pretty high entry barrier, too, for ER portfolios under $500K.

Further to Saluki's comments, this is also NOT the time to be shoving money into a private equity fund. There is already too much money chasing deals, which inevitably means that bad/overpriced deals are being done. Then you add in the multiple layers of fees for the manaers of both the private equity shop and the fund of funds and it becomes pretty unattractive.

Very intesting so far, by regarding my question. Does anyone here invest in these vehicles, and if you don't but have the assets to do so, why don't you?

Screw the private-equity funds or their hedge brethren-- I don't need to pay high fees for dubious opportunities. I'm still trying to figure out how to strike up an investment conversation with the Oahu owner of the "Cartridge World" franchise...

 

[bbuzzard]

Also note that David Swenson of Yale, while recommending private equity for institutional investors [like endowments], doesn't recommend them for individual investors.

My relatives take on the problem. I am still planning to closely investigate PE funds.

 

[CybrMike]

Anecdotal evidence of course, but IMHO, now is the worst time to be investing in Venture Capital funds. I just sold my business to a Venture Capital company for 8 figures. Money is flying around pretty loose right now. Lots of money available for VCs so there is pressure to make investments.

Like most things, the time to invest is when people can't stand the asset class, not when its hot.

 

[audreyh1]

This is all hitting close to home.

The manufacturer of our motorhome was just bought out by a private equity group. I suspect it is because private equity is so "hot" right now.

Unfortunately when we bought our motorhome there was no evidence of financial distress at the company (otherwise we would not have bought from them). Apparently things really went downhill these past 6 months but now they've been "rescued". I really wonder what the private equity company has gotten into, but they have brought a big name in the RV industry to help the company "restructure".

I guess it's good for us - we should at least get a couple more years support from the company instead of being "orphaned" right away.

Audrey

 

[brewer12345]

This is all hitting close to home.

The manufacturer of our motorhome was just bought out by a private equity group. I suspect it is because private equity is so "hot" right now.

Unfortunately when we bought our motorhome there was no evidence of financial distress at the company (otherwise we would not have bought from them). Apparently things really went downhill these past 6 months but now they've been "rescued". I really wonder what the private equity company has gotten into, but they have brought a big name in the RV industry to help the company "restructure".

I guess it's good for us - we should at least get a couple more years support from the company instead of being "orphaned" right away.

Audrey

I wouldn't sweat it. The usual private equity game it to buy scratch & dent businesses using a ton of debt to pay for it, clean up the problems and then either IPO the company or buy a bucnh of other players in the same business, roll them up together, then IPO. Sometimes they also sell the cleaned up company to another private buyer (competitor, etc.).

 

[Brat]

IMHO Private Equity and VC funds are different animals.

A family member works for a VC. There are good reasons why the principals choose their investors, high net worth or an institutional investor isn't enough. This is not an asset class for the needy in any sense of the word. The investor needs to be able to loose it all and not see in as more than a blip in their financial or emotional life.

 

[audreyh1]

I wouldn't sweat it. The usual private equity game it to buy scratch & dent businesses using a ton of debt to pay for it, clean up the problems and then either IPO the company or buy a bucnh of other players in the same business, roll them up together, then IPO. Sometimes they also sell the cleaned up company to another private buyer (competitor, etc.).

Oh - we're not sweating it. In fact we are rather relieved. It does seem that this particular private investment group (Monomoy Capitol Partners) is interested in collecting a group of RV companies. There is new money to keep the company going for at least a few more years and we figure that they HAVE to take care of existing customers and dealers if they hope to attract new ones.

Audrey

 

[magellan_nh]

There's an interesting cnn/money magazine article on private equity at http://tinyurl.com/yaqxvx

The article basically rehashes what's already been said here, but it has additional facts and figures and was a pretty good quick read.

Jim