Private Equity Fund Investments: New Insights on Alignment of Interests, Governance, Returns and Forecasting (Global Financial Markets)

This book presents new, advanced, evidence-based guidance on investing in private equity funds: first by assessing the investor's environment and motivations, then by looking into the risks, returns and overall performance of funds and finally, by offering practical solutions to the illiquidity conundrum. Why invest in private equity funds? Returns are the obvious reason. However, not all investors are looking for the same level, occurrence, and recurrence of returns, nor indeed the same level of associated risks. Moreover, the selection of a fund manager can lead to a great number of uncertainties, such as fluctuating alignment of interests, evolving macroeconomic conditions, and declining marginal returns. This book presents new, advanced, evidence-based guidance on investing in private equity funds: first by assessing the investor's environment and motivations, then by looking into the risks, returns, and overall performance of funds and finally, by offering practical solutions to the illiquidity conundrum. This book has been developed from extensive, bank-sponsored research, and provides both practical and theoretical insights Why Invest In Private Equity Funds? Returns Are The Obvious Reason. However, Not All Investors Are Looking For The Same Level, Occurrence, And Recurrence Of Returns, Or The Same Level Of Associated Risks. Moreover, Fund Manager Selection Itself Can Lead To A Great Number Of Uncertainties, Such As Fluctuating Alignment Of Interests, Evolving Macroeconomic Conditions, And Declining Marginal Returns. This Book Presents New, Advanced, Evidence-based Guidance On Investing In Private Equity Funds: First By Assessing The Investor's Environment And Motivations, Then By Looking Into The Risks, Returns, And Overall Performance Of Funds And Finally, By Offering Practical Solutions To The Illiquidity Conundrum. This Book Has Been Developed From Extensive, Bank-sponsored Research, And Provides Both Practical And Theoretical Insights-- 1. Introduction -- 2. Sub-optimal Risk-return Profiles In Private Equity -- 3. Fee Levels, Performance And Alignment Of Interests In Private Equity -- 4. The Predictive Power Of The J-curve -- 5. Conclusion. Cyril Demaria. "Why invest in private equity funds? Returns are the obvious reason. However, not all investors are looking for the same level, occurrence, and recurrence of returns, or the same level of associated risks. Moreover, fund manager selection itself can lead to a great number of uncertainties, such as fluctuating alignment of interests, evolving macroeconomic conditions, and declining marginal returns. This book presents new, advanced, evidence-based guidance on investing in private equity funds: first by assessing the investor's environment and motivations, then by looking into the risks, returns, and overall performance of funds and finally, by offering practical solutions to the illiquidity conundrum. This book has been developed from extensive, bank-sponsored research, and provides both practical and theoretical insights"-- Provided by publisher Cover; Title; Copyright; Contents; List of Figures; List of Tables; Foreword; Acknowledgments; List of Abbreviations and Acronyms; 0 Introduction; 0.1 Problem analysis; 0.1.1 Limited partners: irrational investors subject to biases; 0.1.1.1 Limited partners: irrational investors; 0.1.1.2 Context of investment: intrinsic and extrinsic factors; 0.1.1.3 Current regulations (until 2007); 0.1.1.4 New regulations (from 2007); 0.1.2 General partners are not subject to effective corporate governance; 0.1.3 Declining marginal returns: the defining moment of LP-GP relationships; 0.2 Research objective 0.5.3.2 General partner selection: agency theory and critiques0.5.3.3 Consequences: LPs motivation, GP selection and portfolio construction; 0.5.4 Risks in private equity; 0.5.5 Liquidity and time horizon; 1. Suboptimal Risk-Return Profiles in Private Equity: The Case of Minority Business Enterprises Investing; 1.1 Research question; 1.2 Method; 1.3 Results and discussion; 1.4 Conclusion and further discussions; 1.4.1 Anecdotal confirmation of the conclusions; 1.4.2 Empirical confrontation of the conclusions, and rebuttal; 1.4.3 Further discussion: investing in underprivileged markets 0.3 Methodology0.4 Terminology; 0.4.1 Private equity: definition; 0.4.1.1 Private equity: sectors included; 0.4.1.2 Private equity: sectors excluded; 0.4.1.3 Private equity funds; 0.4.2 Limited partners: definition; 0.4.3 Limited partners: categorization and motivations; 0.4.3.1 Family offices and high net worth individuals; 0.4.3.2 Foundations and endowments; 0.4.3.3 Sovereign wealth funds and governmental agencies; 0.4.3.4 Funds-of-funds and gatekeepers; 0.4.3.5 Public and private pension funds; 0.4.3.6 Insurance groups; 0.4.3.7 Banks; 0.4.4 General partners: definition 1.5 Summary and contribution to the research2. Fee Levels, Performance and Alignment of Interests in Private Equity; 2.1 Empirical framework and literature; 2.1.1 Private equity returns: measures; 2.1.1.1 Absolute measures of performances; 2.1.1.2 Relative measures of performances; 2.1.2 Private equity risks assumptions; 2.1.3 Limits of current benchmarking methodologies and indexes chosen; 2.2 Data and methodology; 2.2.1 Drawdowns; 2.2.2 Distributions; 2.2.3 Data description; 2.2.4 Selection of indexes; 2.2.5 Data processing and methodology; 2.3 Analysis and findings 0.4.5 Corporate governance: definition0.5 Framework; 0.5.1 Market inefficiencies in private equity; 0.5.1.1 General inefficiencies of the financial markets; 0.5.1.2 Inefficiencies specific to private equity; 0.5.2 Corporate governance in private equity; 0.5.2.1 Moral hazards in private equity; 0.5.2.2 Informal governance levers in private equity; 0.5.2.3 Formal governance levers in private equity: LPA and other mechanisms; 0.5.3 Selection of general partners and motivations of limited partners; 0.5.3.1 General partners selection process and evolution Front Matter....Pages i-xviii Introduction....Pages 1-116 Suboptimal Risk–Return Profiles in Private Equity: The Case of Minority Business Enterprises Investing....Pages 117-140 Fee Levels, Performance and Alignment of Interests in Private Equity 1....Pages 141-188 The Predictive Power of the J-Curve 1....Pages 189-237 General Conclusion....Pages 238-252 Back Matter....Pages 253-276 2.3.1 Analysis of the paid-in to committed capital ratios