A large body of academic research demonstrates that private equity, encompassing leveraged buyouts and venture capital, has underperformed similarly risky public equities. However, there is hope in evidence suggesting that older, more experienced funds tend to show better performance with greater persistence. This persistence is often attributed to the skill of private equity partnerships in selecting better investments and adding post-investment value.
Additionally, successful private equity firms enjoy preferential access to investments and better terms, thanks to their reputational value. This advantage allows them to acquire startup equity at a discount, perpetuating their success over time. The impact of legislation like Sarbanes Oxley has also reshaped the private equity landscape, making it less accessible to investors looking to capitalize on smaller companies with potential for outperformance.
Despite these challenges, innovations in private equity investing have made the asset class more accessible and cost-effective. Evergreen funds offered by fund families like Voya and JPMorgan provide smaller minimum investments, simplified tax reporting, and consistent liquidity. These developments, alongside a focus on diversification and cost management, offer investors an opportunity to benefit from the potential returns of private equity.
In conclusion, while private equity presents unique challenges and opportunities, investors can navigate this complex landscape by diversifying their risks through indirect fund investments, focusing on venture capital, and selecting managers with a track record of outperformance and low expenses. By embracing these strategies, investors can harness the potential benefits of private equity while mitigating its inherent risks.
