Risk/Return Profile of Private Equity Fund Strategies – October 2015

by Ciantelle Lawrence

  • 16 Oct 2015
  • PE

Investors can select from a wide array of private equity investment strategies. These strategies range from fund types that have the potential to offer superior returns but are accompanied with a large amount of risk, to strategies that provide lower levels of risk but are more likely to result in conservative, stable returns. This blog will show how Preqin’s Performance Analyst online service provides insight into risk (measured by standard deviation of net IRR) and return (measured by median net IRR) for private equity strategies of vintages between 2002 and 2012.

The chart above illustrates that on average, secondaries funds across the vintage years shown provide the highest median net IRR at 15.5%, with a corresponding standard deviation of 9.2%. In contrast, early stage venture capital has a median net IRR of 7.9% and presents the highest level of risk of all of the strategies shown, with a standard deviation of 19.7%. This is unsurprising given the high risk factors associated with early stage venture capital, such as substantial business risk exposure and liquidity risk. Similar to venture capital funds, growth funds have a high standard deviation at 16.8%. On the other hand, mezzanine funds have the lowest standard deviation of 5.3%. Additionally, fund of funds strategies offer less volatility in terms of reported net IRRs, with a relatively low standard deviation of 7.3%, due to the diversification that these fund types provide. Funds of funds also provide higher returns on average than more passive strategies such as mezzanine.

Both early and late stage venture capital funds are high-risk strategies. However, if these strategies are successful, investors are compensated accordingly with some of the best returns. Those seeking investment in venture capital are often attracted by the prospect of ’10 baggers’, or a jackpot win, appealing to those less risk-averse investors.

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