Extending the Frontier in Private Equity

Global investing can be particularly challenging due to issues of access, significant legal hurdles, and lower levels of transparency. The speakers in this 2011 FOX Fall Forum session discuss methods for identifying and evaluating new opportunities in private equity. 

• Private equity funds have attracted almost $3 trillion over the past decade. However, empirical evidence shows that median buyout and venture capital funds have underperformed public market equivalents (the gap between upper quartile and median performance is in the region of 600 basis points). Hence, private equity is not a “silver bullet” to achieving superior investment returns. 
• Greycourt & Co CIO Gregory Friedman pointed out that top-quartile funds significantly outperformed, with U.S. buyouts generating 19% and venture capital generating 23% (there will be some variance to this number outside the U.S.). 
• Private investors face formidable challenges in identifying good quality proprietary deal flow (top-tier funds or direct investments) and gaining access to these funds as they compete with typically larger institutional dollars. A way for families to overcome this obstacle is to leverage the know-how and networks gained through their operating business. In other words, they bring non-monetary value to the fund manager. 
• A survey of 50 European family offices by LPQ found that wealthy European families remain confident that private equity remains a quality long‐term investment. Indeed, the research suggested that families see the difficult economic environment as affording opportunities to acquire assets at lower or distressed prices. 
• According to Luca Salvato of Coller Capital, investment in the secondary market is accelerating. Four key trends can be discerned: Secondary and tertiary buyouts are numerous and fiercely contested; a “use it or lose it” approach to undrawn commitments continues to drive up entry multiples; significant debt capital is driving leverage multiples close to 2006 levels; finally, public‐to‐private deals are being seen again in the U.S. 
• In spite of a rebound from 2008-2009 activity levels, private equity funds are challenged on a number of fronts: Many funds will require extension periods to realize assets, fundraising remains very difficult and a consolidation is likely as general partners fail to make carry (carried interest). Indeed, some funds will simply run out of money, or time, to invest, hurting performance.