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Private Equity

What Is Private Equity?

Private Equity is an investment in non-publicly traded companies. These companies can be newly formed or in business for many years.

How Many Companies Are Private?

The population is very large. For those companies with over $10 million in sales, there are over 117,000 private companies versus 18,000 publicly traded companies. This means that 7 out of 8 of the largest companies in America are privately owned.

Why Are These Companies Successful?

They are successful because the owners and managers are usually the same people. Furthermore, private equity investors assist and direct their companies in more effectively managing their business.

How Do You Define Success?

The best available measure is net job creation. In the past 25 years, the net addition to the work force is over 30 million new jobs. Not one net addition occurred in the 500 largest publicly traded companies. An estimated 90% have been added by privately held firms.

Why Invest In Private Equity?

There are two reasons. Private equity has provided higher investment returns and better fund diversification (lower risk). For the last 29 years private equity returns have dramatically outpaced other asset classes including public equity. (Study was by Josh Learner and Paul Gompers of Harvard Business School) For the years 1972-2000 Learner and Gompers calculated that a 5% increase in private equity investment would have added 50% in value to the total portfolio assets examined from the beginning of this period.

Is This A Good Time To Invest In Private Equity?

Yes. The relative valuations have never been more attractive. Private equity investments are considerably cheaper than their public counterparts. Private companies are being purchased at an average of 9 times earnings while publicly traded companies are selling for an average 27 times earnings.


How Much Money Is Being Invested In Private Equity?

From 1991-2007, the funding rose from $5 billion/year to over $260 billion/year as all kinds of investors began to see the attraction of this asset class. Actual investing in 2007 increased significantly to over $260 billion.

What Do Other Funds Allocate To Private Equity?

Venture Economics estimates 5.6% of pension fund’s total assets were invested in Private Equity at the end of the year 2000. Larger funds allocate higher percentages to Private Equity than smaller funds. Public funds average 5%, while corporate funds are over 6% invested in private equity. Most endowments and foundations invest approximately 20% of their assets in private equity.

Getting Started

Where Do We Begin?

You must start by allocating a certain percentage of the total fund to private equity. Five percent (5%) is close to the average for a fund’s initial commitment to Private Equity.

Will Our Actual Investment Equal Our Allocation?

No. This is a frequently asked question. The actual investment phase usually takes about 5 years. This would indicate an average investment of less than 1% in the 1st year and 2% in the 2nd year, thus taking almost 5 years to attain the full 5% allocation. Unfortunately, the full 5% level is almost never reached because companies are sold or taken public and the proceeds are then returned to you. A September, 1999 Pension and Investments article indicated Vassar College had an actual investment level of 3.2% versus an allocation of 7.0% for April 1999. If you wish a higher investment level, the allocation percentage should be at least 1.5 times higher than the actual desired investments a pension plan wishes to commit to Private Equity.

What Do We Do Now?

You must decide how you will invest in Private Equity. You either make direct investments in a group of general partnerships or choose a Fund of Funds manager to select and build their Private Equity portfolio. The first option requires Private Equity investment professionals on staff and a great deal of experience and selection expertise. The recent growth in Fund of Funds management has provided the required expertise for Private Equity investing. Fund of Funds are the primary reason Private Equity has experience such dramatic growth in recent years.

What Happens Later?

Money is returned to you when companies are sold or taken public. To maintain your investment commitment, you must continually select new partnerships or return some of the proceeds to your Fund of Fund manager for reinvestment.

The Portfolio

What Should Your Private Equity Portfolio Look Like?

First and foremost it should be very diversified. This incorporates using many different types of Private Equity Funds (Venture Capital, Buyout, Mezzanine, Turnaround, Distressed Debt, etc.). Funds should be diversified by size, type, geographic region and investment focus (Healthcare, Technology, Services, Manufacturing, etc.). The portfolio should also be diversified by investment structures ranging from pure equity to debt financing with equity enhancements.

How Many Partnerships Do We Need?

A $25-50 million portfolio will be well diversified with 10-15 different partnerships.

How Many Companies Will We Own?

Based on owning 10-15 separate partnerships, with each partnership investing in 15-25 different companies a total of 250 portfolio companies can be expected in a portfolio. A $25 million portfolio would have an average investment of $100,000 per company. This provides even greater risk control, through diversification, for the Private Equity portfolio.


The rate and level of Private Equity investing has grown dramatically over the last decade.
Private Equity represents the largest and most attractive investment opportunity today.
Current investment timing is particularly advantageous.
This is a category that is funded slowly. The actual invested level will always fall short of the allocation. Near term cash needs will be small.
The portfolio will be well diversified on every conceivable basis. A $25-50 million fund will hold an average of 12 partnerships and 250 individual companies.