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The Risk-Return Trade-Off of Private Equity Funds in Each Region

by Etienne Paresys

  • 19 Feb 2010
  • PE

We looked at the risk and return trade-off for global and regional funds in order to assess the level of risk attached to each geographic focus. Fund returns were calculated as the average IRRs for funds of vintages 1996 to 2006, while risk is represented by the standard deviation of these returns.

Our analysis shows that private equity funds investing on a global basis have had the lowest risk level, while Asia and Rest of World funds have a very high risk profile but, posting an average IRR of 20% for the observed period, they also have the ability to deliver high IRRs. With high standard deviation and average return, if some Asia and Rest of World funds are performing very well, others must show disappointing performance. For the vintages 1996 to 2006, North American and global funds show comparable risk levels and have generated similar returns at around 7%. With an average net IRR of 13% and a standard deviation between those of global and North American funds, European private equity funds are offering an attractive risk and return trade-off to institutional investors.

This analysis reveals that there are significant differences between the performance of funds investing on a global basis or within a single region. Investors with an appetite for risk should consider investing outside Europe and North America, while global funds appear to be suitable for more risk-averse investors. European private equity appears to have delivered an attractive risk-reward trade-off.

For more information on the performance of global and regional private equity funds, please click here.

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