How Good Are Private Equity Returns?

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How Good Are Private Equity Returns?

This article by Robert Conroy and Robert Harris researches the historical successfulness of investments in firms from the private sector as opposed to investments in firms traded publicly. The article begins by referencing how private equity investment has grown from what they believe is a correlation to huge management fees, reduced transparency and concern over job loss. More institutions are taking this path in search of higher returns and diversification.

The growth in private equity funds has increased, but it has always been seen as a solid investment by many. According to the National Venture Capital Association, over the past 20 years, the average annual return was 14.3% on private equity funds. The article compares that return to the returns of the S&P 500 and NASDAQ which were 11.2% and 12.6% over the same span, respectively. This comparison shows are superior return by investing with private equity.

The article defines private equity as all equity claims not traded in public markets. For their purposes, private equity refers to private equity investments in all stages of a company’s life. They focus on investments by outside investors versus entrepreneurial investment by individuals and families. These investors include financial institutions, endowments, pension funds and wealthy individuals.

There are various problems when attempting to measure private equity performance since a lot of the assets are not frequently traded. Measuring returns to private equity funds is typically complicated because market prices are old or not available. The article points to the example of limited partnerships, where there are two layers of illiquidity. First, the partnership claims are generally not traded. As opposed to a publicly traded firm, there is no ready market price for the assets within private equity firm’s portfolio. Second, the article points out that the underlying assets in the fund are...
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