Private Equity in a Portfolio Perspective
Private equity has historically provided one of the most attractive risk-adjusted returns among asset classes¹. Hence, portfolios allocating to private equity have historically generated a greater return with similar risk as traditionally diversified portfolios².
¹ McKinsey & Company (February 2020). A new decade for private markets. McKinsey Global Private Market Review 2020.
² Tutrone, A. (January 2019). Private Equity and Your Portfolio. Neuberger Berman Insights
In its letter of 29th June 2017, Norway’s Finance Ministry asked Norges Bank, the investment manager of the Norwegian Government Pension Fund, controlling over $1 trillion in assets under management³, to evaluate whether private equity should be included in the investment universe for the world’s largest sovereign wealth fund. Professors Doskeland and Strömberg were assigned to the task and ventured into a paper reviewing the asset class in great depth before providing a final recommendation for the fund. They concluded that including private equity in the fund’s mandate improved the fund’s capacity to optimize risk-adjusted returns, further alluding to the possibility that private equity’s role in global markets could enhance its diversification potential over time4.
3 Norges Bank (2019); The fund's development. Retrieved from https://www.nbim.no/en/
4 Doskeland, T., & Strömberg, p. (January 2018). Evaluating Investments in Unlisted Equity For the Norwegian Government Pension Fund Global (GPFG). page 22.
Data from at least the last three decades shows that private equity provided investors with the highest risk-adjusted returns5 as an asset class. Private equity offered the highest annualized returns among the major asset classes while, exhibiting less volatility than listed equities, even when desmoothing private equity returns6.
5 As measured by the Sharpe Ratio (={period returns - risk-free returns} / {period return deviations})
6 Desmoothing private equity returns refers to process of using proxy daily volatility figures to adjust for the fact that private equity funds report their performance quarterly and not daily.
Figure 1: Asset Classes Risk Return Chart (7)
7 KKR Global Institute (2019) p. 7. Data as at 1Q86 or earliest to 4Q17, and de-emphasizing 2008 and 2009 returns at one third the weight, due to the extreme volatility and wide range of performance which skewed results. Source: MSCI AC World Gross USD for Listed Equities; Barclays Global Aggregate Total Return Index Unhedged USD for Fixed Income; Cambridge Associates Global Private Equity for Private Equity. HFRI Fund Weighted Composite Index for Hedge Funds; and Barclays US &-Bills 3-6 Months Unhedged USD for Cash. Desmoothed Private Equity Volatility comes from the same dataset and the adjustments performed by Ilmanen (2018), p. 10.
Yet, Sharpe Ratios are not prescriptive and asset classes are not assessed by investors in isolation. What is also relevant is an asset class’ diversification potential, since, as Markowitz, the father of Modern Portfolio theory, put it, diversification is “the only free lunch in finance”. The very basis of investment portfolios is to construct them with imperfectly correlated assets in order to take advantage of the principle of diversification. Given the current access to low fee and highly diversified public market portfolios, we suspect that private equity represents the only remaining missing piece for individuals to access the “free lunch” of portfolio diversification.
COIP DACH Growth II Fund
Opportunity to invest alongside entrepreneurs and participate in the growth stories of the DACH region through new fund COIP DACH Growth II.
Access to unique investment opportunities together with an established partner and invest alongside successful entrepreneurs
Benefit from the established entrepreneurial network and extended industrial and service investment expertise
Participate through a structured, institutional set-up with transparent and efficient features
Professional portfolio construction with diversification and attractive risk-return profile
Fund Name: COIP DACH Growth II SCSp
Domicile: Luxembourg
Duration: Closed Ended (10+1+1)
Base Currency: EUR
Target Size of the Fund: 120 million (hard cap 150 million)
Investment Strategy: Growth; minority & majority equity stakes in unlisted companies with positive unit economics and proven business models (revenue >EUR 5m); investment amount >EUR 5m
Investment Region: DACH
Structural Approach: 50% of each investment funded by COIP network at identical terms
GP Commitment: at least 1%
Expected Number of Investments: between 8 and 12
Minimum Investment: EUR 5 million for institutional / EUR 1 million for qualified private investors
Management Fee: 2%
Carried Interest Fee: 20%
Repayment: Self-liquidating fund (regular return of free cash upon exits)
For more information please contact:
Beat Egger; +41 44 521 10 79
Rainer Lang; +41 44 521 10 56