THE BENEFITS OF PRIVATE EQUITY INVESTMENT
For many investors, private equity investment is considered the primary form of alternative investments. While no one definition exists, private equity consists of a wide range of investment opportunities which are generally non-public in nature and often involve direct management oversight for the primary investor. In this annual update, the return and risk characteristics of various private equity strategies are reviewed. Results show that traditional market factors, especially equity market return, often are highly correlated with private equity returns.
Therefore, private equity may provide more of return enhancement rather than risk diversification to portfolios comprised principally of traditional stock and bond investments. Today, publicly traded firms also exist which invest directly in private equity. These vehicles offer a public-pricing-based return metric rather than the accounting-based return metrics often used to measure private equity returns. Analysis shows that, while the accounting-based (internal rate of return) and market-based returns often reflect similar return processes, differences do exist and investors should be aware of potential issues in the use of various private equity benchmarks.