Beauty & Beast that is Private Equity Returns

In several articles that I have read recently, the popularity of private equity has been highlighted supported with figures from either fundraising, dealmaking or surveys with institutional and other large investors.

Apparently everybody is happy with their experience of investing in private equity funds and want more. Especially given the climate of the most few years where yields have been hard to find and from some risk-less investments have turned negative.

Within this general frame, and taking into account the experience of being in private equity investing last time this happened (think 2006-7-8), how should one consider investing in an illiquid 10 year lock up fund and was should be the proper extra return that one should expect and ask for?

These are questions that you can answer either from an academic perspective or experience. I personally prefer the second, especially taking into account the adage that even though real world don't matter in academics, in the real world it does.

From my personal experience of helping investors invest in funds in a wide spectrum from early stage venture to large buyouts, and also my personal experience of working with startups and seed & angel investments, the return and risk profile differs a lot. And I mean a lot.

On one spectrum are funds where you expect to loose money on about 90% of your investments. These are seed funds, or angel investments. And then there are funds that cone right after that stage where about 20% of your invested money will bring zero returns, 50% will only make it back and about 10% making record breaking 10X (saving the overall return) or more returns and about 20% making 2x to 3x type of returns (Venture Capital) in a really long time period - could be anywhere between 6-7 years to 10-15 years.

On the other end of the spectrum are the senior lending private debt funds where IRRs of 6-8% could be expected (including all the fees charged and collected etc.) with a 95% certainty given the historical record (not including the black swan events which are more and more common). Similar are some real asset funds from timber to land where you could park large amounts in pretty safe long terms investments and collect 1-3% returns over inflation.

In between are the plain vanilla private equity funds from lower mid market to large buyouts with expected returns from 10-12% to 25%+ IRR with average holding periods for assets of 6-7 years at most and an overall return of your capital's bulk (c. 90%) within the investment period (generally 4-5+1 years) and all your returns within the normal life (generally 10) of the fund.

These are pretty impressive return to get over such long terms. You would be really pushed hard to find any equity fund ro any other asset class fund with 10-15% IRRs over such long terms.

http://awealthofcommonsense.com/2018/06/does-private-equity-deserve-more-scrutiny/