Belief in higher returns from private equity may be misplaced

http://www.eurekalert.org/pub_releases/2015-10/uol-fbi101315.php

Public Release: 13-Oct-2015
Finance: Belief in higher returns from private equity may be misplaced
Investors should not expect private equity to deliver better results than traditional strategies
University of Luxembourg

New research at the Luxembourg School of Finance suggests that investor belief in higher returns by investing in private equity investment funds may be misplaced, calling into question their rising popularity.

Many investors believe that higher returns can be achieved by investing in funds which buy firms not listed on stock markets (so-called private equity investment funds) rather than those funds that invest in listed companies. Private equity funds have become increasingly popular recently with large institution (particularly pension funds and insurance companies), as well as wealthy individuals seeking high returns in an era of low interest rates.

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"Existing studies are susceptible to selection bias," explained Dr Kräussl. "They rely on information reported by the funds' general partners or from large investors, but their experiences are often different from those of the typical private equity investor. We found a way to avoid this selection bias," he said.

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Using this measure suggests that expectations of long-term performance of private equity investments would vary little from the performance of normal stock market indices (between -0.5 per cent and +2.0 per cent). In other words, expected returns are very similar to those of holding listed securities on the major exchanges. Also, the systematic risk of start-ups (i.e. private equity investment) was found to be similar to investing in publicly traded stocks of small and medium-sized companies

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