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An Analysis of Private Equity Risk/Return by Region

by Ryan Soon

  • 31 May 2017
  • PE

Understandably, institutional investors expect compensation for taking on more risk in their investments. However, not all markets are equal and investors must be fully aware of the risk and reward when entering illiquid asset classes such as private equity. Preqin’s Private Equity Online provides insight into the risk/return profiles of over 2,600 private equity funds of vintage 2003-2013. Using this data, it is possible to analyze the risk/return profiles of different regions within the asset class.

The chart above illustrates that funds focused primarily on North America carry the lowest risk, with a standard deviation of net IRR of 14.6%, followed by Europe- (16.3%), Asia- (16.8%) and Rest of World-focused (17.0%) vehicles. North America-focused funds also outperform vehicles targeting other regions, returning a median 10.9%, although Asia-focused funds follow closely with 10.7%.

The favourable risk/return profile of North America-focused funds could be due to the region’s established capital markets, with a comparatively secure legal and regulatory environment that offers lower investment risk. Fund managers are not only able to put their capital to work, but can also exit investments faster than in other regions. Less developed regions tend to have higher associated risks as the markets are less liquid; Rest of World-focused funds have the highest risk but also the lowest return among the four regions examined.

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