Private equity is a relatively young asset class, but has evolved substantially over the last two decades. Due to the long-term horizon required for investing, private equity is dominated by institutional investors, such as pension plans, foundations, endowments and family offices. Investors are increasingly turning to alternative asset classes, such as private equity, to enhance the modest returns expected from traditional equity and fixed income asset classes.
[...] When statistical analysis is used to measure the risk profile and diversification benefits of private equity investments, the results are misleading. Private equity investments are highly correlated with public equity and are more risky due to the introduction of unique risk factors, such as the illiquidity of private equity investments, leverage or the early stage nature of certain private companies (venture capital). One of the greatest risks in private equity is selecting managers that fail to deliver top performance, which can substantially dilute portfolio performance. [...]
[...] Evolution of the Asset Class Private equity is a relatively young asset class. While its roots can be traced back over 50 years, it was not until the late 1970s, when regulatory and tax law changes allowed U.S. pension funds to enter the asset class, that private equity became accepted as an institutional asset class. In the 1990s, private equity truly came into vogue and gained broader acceptance among institutional investors. During the decade of the 90s, there was a tremendous boom in the private equity industry, with the emergence of brand name firms managing multi billion dollar sized funds. [...]
[...] However, because of certain complexities inherent to the asset class, private equity requires specialized planning and portfolio management techniques, which require a blend of investment, legal and accounting expertise. Some of these key considerations for investors in private equity are discussed below. Structure Due to their illiquid nature, private equity investments are long-term oriented and typically governed by contracts between the investor and the manager. There are several methods investors can use to access private equity investments. Direct investment transaction involving the purchase of debt or equity securities of a private company. [...]
[...] As in traditional asset classes, the objective is to identify skilled investors with attractive track records. However, because private equity is an unregulated industry, investors should spend time evaluating the character of investment team members, the relevance of their prior experience and the team's history of working together. This is accomplished through extensive interviews with team members and interviews with third party references. As well, investors should carefully evaluate the firm's back office resources to ensure the manager is capable of timely and [...]
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