PE HUB Wire Highlights, 10.18.19


private equity, Chris Witkowsky
Witkowsky

Private equity’s outperformance, How GPs deal with key-person issues

Happy Friday Hubskis!

Outperformance: Private equity will continue its outperformance of public markets for the foreesable future, according to Andrea Auerbach, head of global private markets at Cambridge Associates who is an excellent person to talk to for an honest view of the private markets. I caught an interview with Auerbach on Bloomberg recently.

Cambridge’s U.S. private equity index produced an about 13 percent return over the one-year period as of March 31, 2019. Over a three-year period, the index was generating a 16 percent return. By comparison, the S&P 500 index generated a 9.5 percent return over the one-year period.

“Returns of 13 percent against the field of other investable options, that’s standing quite tall and attracting a lot of attention,” Auerbach said in the interview.

Auerbach made the point that private equity is not monolithic, rather made up of thousands of firms raising funds of different sizes and acquiring companies. “It’s what they do to unlock the value of those companies that can create the outperformance … so the dispersion of return around the 13 percent is enormous,” she said.

She also pointed out the … flexibility … of internal rate of return as a measurement of performance. IRR is time weighted, and there are ways to boost that number, including exiting an investment earlier than expected. As well, use of capital call commitment loans can juice IRRs. This effect comes from shortening the time period LP capital actually sits in an investment.

“What are you hiring that manager for? You’re hiring them to acquire a company and unlock the value, not to use a little bit of leverage at the top and increase and boost that rate of return,” she said.

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