Risk and Return Analysis by Fund Strategy

by Hayley Wong

  • 30 Mar 2012
  • PE

Using Preqin’s Performance Analyst product which currently has performance data for over 5,800 private equity funds we can analyse the risk and return associated with each fund type for vintages 2000-2009. The measure of risk for each strategy is calculated by the standard deviation of the net IRRs, and to analyse the returns generated by each fund type will be determined by the median net IRR. It should be noted that this analysis is conducted by isolating each private equity strategy and as such does not from part of a wider portfolio.

Examining the net IRR of these funds the most risky fund strategy is growth, with a standard deviation of 24%, but this strategy generates the highest median return of 10%. Other strategies which also have a high level of risk associated with them are early stage funds, natural resources and real estate funds, all generating a standard deviations of 20% or higher; however, the corresponding median returns for early stage and real estate funds yield lower median returns of -2% and 4% respectively, and contrastingly natural resources generates a higher median return of 13%. Fund types which are associated with low risk are fund of funds and mezzanine vehicles and they both yield returns of less than 10%.

Analysing just the risk and return of venture funds for the overall venture industry, the standard deviation of returns produced by these funds is 14% and they generate a median net IRR of 3%. Looking further and examining venture by investment stage, early stage funds are the riskiest and generate the lowest median return. Venture fund with a focus on expansion and later stage investments produce a standard deviation of 24% and yield a median net IRR of 5%. Examining venture funds with a focus across all stages produce a standard deviation of 16% and have a median return of 3%.

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