Risk and Return by Fund Strategy

by Etienne Paresys

  • 17 Jul 2009
  • PE

Each private equity strategy has its own risk pattern and returns have varied amongst the different private equity fund types. In order to assess the risks and returns specific to each strategy, Preqin analyses the risk-returns pattern for private equity funds of vintages 1996 to 2005.

Most private equity strategies have comparable risk profiles, with most private equity fund types having standard deviations of between 15% and 20%. With standard deviations below 15%, fund of funds, secondaries and mezzanine are the least risky strategies. With its low risk profile and posting a high median IRR, secondaries seems to be a particularly attractive fund type. At the other end of the spectrum, with a standard deviation of 72%, early stage funds have the highest risk. It is also the only fund type reporting a negative median IRR for the period analysed.

Venture capital funds have the second highest risk with a standard deviation of 43% and is also the second worst performer, having achieved a median IRR of only 3.75%. Buyout, the largest private equity fund type in terms of aggregate capital, is generating a good median net IRR but is also the third-riskiest strategy. Real estate and distressed private equity are both showing moderate risk and good returns. Infrastructure is relatively low-risk but generates moderate returns, while natural resources funds offer acceptable levels of risk for excellent returns.

Investors should weight the estimated risk of each strategy against its potential returns in order to design an optimal portfolio of private equity funds. Fund performance varies significantly between fund managers, so investors also need to make sure that they invest with the right managers.

For more information on fund performance, please see the 2009 Preqin Private Equity Performance Monitor.

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