The reasons for investing in private equity are twofold, said Thomas Kennedy, managing director of Kensington Capital Partners, speaking at the Alternative Investments & Absolute Return Strategies for Institutional Investors conference in Toronto. First, private equity can produce better returns. Consultants suggest that private equity returns should surpass public market returns by 300 to 500 basis points, said David Rogers, CEO of Caledon Capital Partners in Toronto.
Second, a vast majority of the investment market in the world is private. For example, of more than 170,000 U.S. companies with more than $10 million-plus in revenues, 88% are private.
Although private equity sounds good on paper, it should not devour a pension fund’s entire portfolio. Large pension funds and institutions typically allocate approximately 5% to 10% of their portfolios to private equity, said Kennedy. But even smaller companies can allocate a portion, too. Kennedy said the best way for small- and medium-size companies to invest is through an established fund of fund. “It is the most prudent and cost-effective.”
Janet Rabovsky, a consultant with Watson Wyatt in Toronto, agrees that performance returns for private equity are good, but does stress that it matters which sector the investment is in, its geographic location and the manager who’s managing the fund. “Returns are not homogenous,” said Rabovsky. “Different funds do well at different times.” This is certainly true when comparing sub asset classes such as early stage venture and mega buyouts.
Despite the potential high returns of private equity, investors may still question whether it is worth investing. “It’s a high-risk, high-governance asset class,” said Rabovsky.
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