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| Private Equity |
Wisdom & Fair Warning
Laurence Neville
04/01/2004
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Private equity’s recent boom-to-bust cycle transformed many of us from
aggressive risk-chasers to cautious capital preservers. In the sobering
aftermath of the bear market, with investment opportunities again beginning to
surface, it is clear that the correct approach lay somewhere in between. Our
goal is to balance our individual appetites for risk and return; doing so
requires an array of information. Obtaining these data and analyzing them
properly is perhaps the biggest impediment to successfully investing in private
equity.
TOP VIEW
Investing in private equity remains more of an art than a science.
Like other alternative asset classes, such as hedge funds, private equity fails
to provide us with the timely and detailed return, risk and correlation data
that we require to make informed decisions. But this investment category is not
entirely a black box; with some careful thought we can craft profitable
portfolios that match our personal risk-reward tolerances. |
Private equity is almost unrivaled on the field of investment for its
opaqueness. The assets of these funds are, by definition, not publicly traded,
and so their valuation depends on the best estimates of the fund itself. The
scope of the variations in this value over time (its market risk) and the
ability to get our capital back, especially during times of market stress (its
liquidity risk), are similarly difficult to estimate. Because of this, success
in private equity investment has traditionally been a triumph of faith over
science.
Private equity backers say that these problems are offset by the
simple fact that this asset class’s risk-adjusted returns exceed those of
practically any other investment. “Private equity compensates investors for its
problems,” says Derek Sasveld, director and strategy analyst, asset allocation
and risk management at UBS Global Asset Management in New York. “Over the long
run—say 30 years—we expect the public equity markets will return around 8.25
percent a year on average. We believe that private equity will give investors
3.5 percent on top of that.” Thane Stenner, a wealth advisor and author of True
Wealth: An Expert Guide, agrees: “It has historically produced superior returns
with a commensurate level of risk,” he says.
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