Aim Well Before Shooting for the (Private Equity) Stars

If you are shooting for the stars it may be wise to look for some reference points to be sure you are aiming in the right direction. Careful navigators always check the Pointers to confirm they have correctly identified the Southern Cross before marking the route.


If you are looking at private equity investments for outstanding returns, you may perhaps find some useful anchoring data in our new Alpha+Beta (Centauri) Report: Gauging the Risk Premium of US Buyout Funds (1995-2010).

We believe we found some very interesting information. They are about not only the size of the risk premium but also the predictability of the private equity returns that, across the board, looks impressive.


The chart above shows total return, risk premium of US buyout funds on a  constant holding period basis versus equivalently calculated S&P 500 returns.

On a rolling basis the unlevered expected return for a buyout fund in the analysed period has been slightly above 6% with a risk premium of close to 3%.

Assuming 1.33x over-commitment, return is approx. 8%. I realize these figures sound less than exciting compared to the double digit rhetoric of the industry. But that’s IRRs – which you can’t eat.

The reality is that in the same period the S&P performed on average 3.5% on an annualised basis over the rolling holding periods analysed. If a bit of diversification is correctly applied, specific risk (and alpha) is smoothed – there is no free lunch out there.

Aim well before shooting for the stars – that would avoid any risk of disappointment.

To receive a copy of the full report, please sign up here.

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