Demystifying Private Equity

Your roadmap to PE

Published on November 27, 2019, Updated July, 16, 2020

Private equity industry trends

$4.11Tn
AuM as of June 2019.1

$495Bn
Capital distributed by fund managers to investors in 2018.2

86%
of PE investors plan to increase or maintain their commitment in the longer term.

Top Performing Institutional Investors are Allocating 40% to Private Investments

According to the latest research conducted by Cambridge Associates3, top decile performing institutional investors have increased their private investments* allocations to a mean of 40%.

Private Investment Allocation

 

Private Investment Allocations Princeton University

49.6%4

Private Investment Allocations University of Texas

40.8%5

Private Investment Allocations Columbia University

39.5%6

Private Investment Allocations Yale University

52.4%7

*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.

¹Preqin; ²Preqin; ³Cambridge Associates Research Report February 2019; ⁴ Princeton University; ⁵ University of Texas; ⁶Columbia University; Yale 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 a 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 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. 10Endowment and foundation data as reported by Cambridge Associates LLC. Graphs are for illustrative purposes only.

The Private Company Universe

The private company universe is significantly larger than the shrinking public company universe, creating a host of opportunities.

98%

of businesses with ≥ $10M in sales are not publicly traded in the USA

https://www.naics.com/custom-market-analysis-profiles
https://site.warrington.ufl.edu/ritter/files/Listed_19802019.pdf

46%

Decline in the number of US publicly traded companies since the 1997 peak

Cambridge Associates November 2017, World Bank 2018.

140k

Number of US private companies

vs

4k

Number of US public companies

Vangaurd

The majority of a company's growth occurs in a private format.

Growing trend: private companies are skipping public markets entirely or going public much later as matured businesses.

The average age of a company at IPO has nearly doubled since 1980: 6 years old in 1980 and 10 years old in 2019 at IPO.
Initial Public Offerings: Median Age of IPOs Through 2017, June 13, 2018

Median age for tech companies going public in 1999 was 4 years, respectively, compared with 12 years in 2018.

Median annual sales, meanwhile, were about $12 million then, compared with $173.6 million last year at IPO .
https://www.wsj.com/articles/the-2019-ipo-frenzy-is-different-from-1999-really-11553918401

Demystifying common misconceptions

"TOO RISKY"

Single deal flow or a single manager approach is a recipe for disaster. Proper diversification greatly reduces the risk of permanent capital.

Probability of Portfolio with TVPI<1.0x Based on Portfolio Size

Cambridge Associates Research Report February 2019

"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.

"TOO LATE IN THE CYCLE"

Professional investors do not attempt to time private markets. They take a systematic, process oriented approach and create a roadmap to advance steadily towards a ‘stabilized portfolio of private equity’ via systematic vintage diversification.

U.S. public vs. private equity returns
By vintage year

J.P. Morgan Asset Management Market Commentary, "Guid to Alternatives Q1, 2019"

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Private Investment Allocations Marketplace Table

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