Private equity industry trends
AuM as of June 2019. 2
Capital distributed by fund manager to investors in 2017. 1
Of PE investors plan to increase or maintain their commitment in the longer term. 2
Top performing institutional investors are allocated 40% to private investments
According to latest research conducted by Cambridge Associates3, top decile performing institutional investors have increased their private investments* allocations to a mean of 40%.
Private investment allocations
*Private investments include non-venture private equity, venture capital, distressed securities (private equity structure), private real estate, private oil & gas/natural resources, timber, and other private investments.
Sources: 3Cambridge Associates Research Report February 2019 4Princeton University 5University of Texas 6Columbia University 7Yale News
THE HIGHER THE ALLOCATION TO PRIVATE INVESTMENTS*, THE BETTER THE RETURNS.
According to Cambridge Associate's endowment and foundation research, the average annualized return for a greater than 15% allocation was 8.1%, 160 basis points higher than the group with less than 5% allocation.
20 year Average Return (%)
Private equity allocations under 5%
Private equity allocations between 5% and 15%
Private equity allocations over 15%
20 years Average Private Investment Allocations (%)
Analysis includes 132 endowments and foundations that provided returns and beginning-year asset allocation for each June 30 from 1998 to 2018. Subgroups are based on each institution's 20-year average allocation to private investments. Solid lines are drawn where the median private investments allocation for the entire universe intersects with the median return for the entire universe.
*Private investments include non-venture private equity, venture capital, distressed security (private equity structure), private real estate, private oil & gas/natural resources, timber, and other investments. Endowment and foundation data as reported by Cambridge Associates LLC. Graphs are for illustrative purposes only.
Manager Selection Matters, Especially in VC and PE
Private and Public Manager Dispersion
Based on returns over a 10-year window
Sources: Lipper, NCREIF, Cambridge Associates, HFRI, J.P. Morgan Asset Management.
Global equities (large cap) and global bonds dispersion are based on the world large stock and world bond categories, respectively. “Manager dispersion is based on: 4Q 2009 - 4Q 2019 annual returns for global equities, global bonds, U.S. core real estate and hedge funds. U.S. non-core real estate, global private equity and U.S. venture capital are represented by the 10-year horizon internal rate of return (IRR) ending Q4 2019.
Data is based on availability as of May 31, 2020.
The Big funds are getting bigger
PRIVATE CAPITAL FUNDS ($) BY SIZE
*As of June 30, 2020
The Private Company Universe
The private company universe is significantly larger than the shrinking public company universe, creating a host of opportunities.
of businesses with ≥ $10M in sales are not publicly traded in the USA
decline in the number of US publicly traded companies since the 1997 peak
Numbers of US private companies
Numbers of US public companies
The majority of a company's growth occurs in a private format
Technology companies are increasingly reaching $10Bn in value pre-IPO.
Demystifying common misconceptions
Single deal flow or a single manager approach is a recipe for disaster. Proper diversification greatly reduces the risk of permanent capital.
With only 1 fund the likelihood of a sub-1.0x TVPI was 24%
The likelihood drops less than 5% with a portfolio of 5 funds
"TOO ILLIQUID; I'M TOO OLD"
Laddered consistently and periodically over 5 years (vintage diversification), a systematically designed PE portfolio should produce a staggered series of consistent cash flows and liquidity events for an investor, based on the assumptions* below.
Laddered Diversified PE Portfolio cash flows for $2.5M Total commitments.
The cashflows in this graph are based on several assumptions, are for illustrative purposes only, and cannot be relied upon. The timing and amounts of actual cash flows can vary widely from this illustration and there is no guarantee of performance results.
*The assumptions are 1) $250K is invested every 6 months over 5 years in a new fund 2) each fund calls 1/3 of committed capital per year 3) the average weighted life of an invested dollar is 4.5 years 4) a 1.6 net MOIC was the assumed growth of each invested dollar.