There are several areas of risk that are unique to private equity, making risk management different to that of public markets. The unpredictable timings of cash flows, illiquidity risk and capital at risk are the primary areas for concern in private equity investing.
The final realized returns for investors in private equity can be affected by several factors, including the skill and expertise of the fund manager, public market fluctuations and interest and exchange rates. This blog looks at the proportion of liquidated funds* by strategy that achieved a TVPI (total value to paid-in) of less than 100%.
The proportions of venture capital (27%) and early-stage funds (31%) that have lost investors capital are significantly greater than those of other strategies examined. This is unsurprising given the nature of venture capital investing, where there is a low survival rate for venture capital-backed companies, and only a small proportion hitting home runs.
At the other end of the risk spectrum, the smallest proportions of funds achieving a TVPI less than 100% upon liquidation are for fund of funds (6%) and secondaries (2%) vehicles, while all other strategies have a capital risk ratio of less than 15%. Capital risk is lower in secondaries, given the spread of investments over multiple direct funds, often across different regions and strategies. Similarly, secondaries minimize risk due to the increased diversification of underlying investments often across vintage years and strategies.
The due diligence process involves assessing not only the risk associated with each strategy within private equity, but also the historical returns. Industry-leading private capital benchmarks are available for free on Preqin’s Research Center Premium, as well as transparent fund returns for over 9,600 private capital funds on Preqin’s online platform. For more information, please visit: https://www.preqin.com/format/products-and-tools/0/2.
*The capital risk ratio is calculated using data for 1,823 liquidated private equity funds. Preqin holds performance data for 6,164 private equity funds.