When looking for the RIGHT private equity manager for your portfolio, you should first consider the corresponding risk and return profiles of various approaches. For example, a fund-of-funds offers risk-averse investors a suitable entry point to the market, holding a portfolio of other investment funds rather than investing directly in individual companies. At the other end of the spectrum, a direct fund concentrates on a single manager, raising the potential for upside gains while also increasing risk. Co-investment funds, or funds that offer a co-investment element, hover between these two ends, consisting of a well-diversified pool of companies, sectors, geographies and lead managers – bringing together the best elements of both.
Next, you should look for managers that are in, or entering, their prime. These are experienced private equity professionals, most likely in their 40s, who’ve worked for a big PE house before, and are now looking to start their own brand. We find they offer tremendous value because not only are they capable and professional, but they’re also highly motivated to make their new outfit a success. In our experience, that alignment bodes well for a strong performing fund.
As with most alternative asset classes, the differential between top and bottom quartile managers is significant. Those in the top decile can produce significant annualised returns –30%+ per annum is possible – whereas the latter should be avoided in order to preserve your principal. In general it’s dangerous to take a broad view of the industry, especially given that public perception is shaped by press coverage of high-profile managers rather than those which are most effective.