Why now? In prior episode we walked you through the history of this asset class to show you that the industry has been through several boom/bust cycles over its 30 year history. And as the old saying goes, history might not repeat, but it does rhyme – and the broad private equity industry has performed remarkably well throughout these market cycles.
Over the past 15 years, which covers two of the worst market corrections in history, private equity has grown your money by a multiple of 4 times. That is more than double what the S&P 500 has given you over that same time period. As a reminder the S&P 500 is an index of U.S. public stocks. And even private equity funds raised at market peaks have posted really attractive relative results at the end of the day.
For example if we look at buyout funds raised in 2007, which was the last (and biggest) market peak and subsequent correction, we see that those funds on average returned 8.8% – outpacing the S&P 500 by 6%. That is not dumb luck. That is because good managers are skilled business operators that have a long time horizon over which they can improve the businesses they own and manage through challenges as they arise, so they have much more control over the destiny of the investments they make.
In addition, because they have the ability to deploy capital over several years, they can pick and choose the best times to invest. So in times when things are looking less attractive they will slow their investment pace, so that they will have more money to invest when conditions are more favorable. For example, in 2008/2009 it was a very opportune time to be a private equity investor (but only if you had capital to invest) and many of these funds raised in 2007 were able to take advantage of that.
But not all managers are created equal – and if you were with the top managers you actually got far above the industry average of 8.8% with a nearly 14% return… impressive. However, if you were invested in one of the worst performing managers you under 5% (hardly worth your while). So there is a really wide dispersion of returns in this asset class (and it’s much wider for venture).
So while the industry on average can do well, any given investor could have had a very different experience because remember you can’t invest in the industry average… there is no passive alternative in this asset class. And that is why good manager selection is key.
Manager selection is critical in PE. But investing with one Manager is similar to putting all your eggs in one basket. It is very risky since one manager cannot the best at everything in all environments. You ignore the vast opportunity set within the Private Equity industry. For investors to have repeatable success rather than lucky results, they need exposure to a group of top managers whose skills, strategies, and areas of focus complement one another. This is exactly the reason why institutional investors have done so well in the asset class. And it is also exactly the reason why individual investors have not.
That concludes our video series. We hope we’ve been able to address a lot of questions on the topic of private equity, but we also hope we’ve interested you enough to ask more. If so, please reach out to us today.