Key Questions to Ask Before Investing in Private Equity
Private equity has proven itself as a consistent outperformer, providing greater long-term returns than stocks and real estate. This is why the vast majority of public pension funds have been allocating to private equity for years.
The American Investment Council’s 2019 Public Pension Study, which analyzed investment returns for 165 U.S. public pension funds, found that private equity delivered a median 10-year annualized return of 10.2%, surpassing 8.5% from publicly traded equities and 4.8% from real estate over the same period.
However, investors shouldn’t let themselves be blinded by the outperformance of private equity as an overall asset class. Just like any other asset, investors should conduct thorough due diligence on a prospective private equity investment opportunity.
At the outset, there are a few important questions that investors need to ask when considering an investment in private equity:
- What is Your Time Horizon? The typical lifecycle for a private equity fund tends to span seven to 10 years. This means it can take nearly a decade, at a minimum, to exit a private equity investment and begin to reap investment returns. Therefore, investors who are looking to save for events farther down the road, such as retirement, will likely find private equity investments more suitable than their counterparts seeking to raise capital in the short term.
- Do You Have Enough Cash On Hand? Private equity investments are, by definition, illiquid. Unlike shares of a publicly traded company, it is very difficult to buy and sell private equity, regardless of whether the investment involves a fund or a hard asset—and as explained above, private equity investments tend to have longer lifecycles to begin with, so investors need to be sure they can handle the lack of liquidity in the short term. If investors are going to require a certain amount of cash on hand in the short term to meet certain obligations, they should check that they will have enough if they wind up taking advantage of a private equity investment.
- How Transparent is the Asset (or the Asset Manager)? Again, by virtue of being private, private equity assets, and the funds that invest in them, tend not to disclose their performance and other key historical metrics. Without past and present performance, or a full understanding of an asset’s operation or a fund’s investment strategy, it is extremely challenging to assign an accurate value to a private equity asset—at the time of initial investment, or throughout the length of the investment.
This is where our AXIS platform can help. We established our solution to consolidate data about asset managers from across the alternative investment universe, including private equity, on one ecosystem.
In addition to enabling investors to make better investment decisions with data and analytics/modeling tools, the AltsAxis offering enables investors to engage with asset managers, and set up in-person and virtual meetings. The ability to ask questions, and obtain answers, about a private equity asset or asset management strategy is vital for deciding whether or not a private equity investment opportunity is worth pursuing.
We believe transparency, and engagement, can lead to well-informed alternative investment decisions. To learn more, explore our solution and community at https://altsaxis.com/about/.