Constructing Optimized Private Equity Programs

We believe that as private markets have grown, institutional investors consider such strategies less ‘alternative’ and more ‘core’ to their overall portfolio. As a result, there is a growing need to take a more holistic and analytical approach in building private market portfolios, benefitting from the various investment types available and differentiating between more alpha oriented strategies in private markets.  

The transaction types we will discuss in this paper are primary investments, secondary investments, and direct co-investments. For most institutional investors, primary fund commitments form the fundamental component of a well-planned, scalable and diversified private equity program. Opportunistic strategies such as secondaries and co-investments are derived from primaries and now provide a more nuanced approach to construct a private equity program.

We highlight the benefits of both secondaries and co-investments in a broader private equity portfolio and perform quantitative analyses to examine how these investment types impact performance, pacing, J-curve mitigation and risk-reward characteristics. We find that a balanced, thoughtfully constructed program of primaries, secondaries and co-investments offers clear synergies and has the potential to deliver superior risk-adjusted returns beyond what each of the three transaction types can achieve in isolation. 

Moreover, it is shown how using these investment types, combined with different geographic exposures and other investment strategies, can enable investors to consider an efficient frontier in private equity. This frontier is a valuable tool to consider aggregate exposure to private and public equity – allowing investors to take a holistic view of their allocations across the equity spectrum. 

Download the complete
article PDF

Comments

There are no comments for this entry yet. Be the first to add your thoughts!

Add Your Comment