Is investing in private equity, venture capital or hedge funds justified given the risks?
After my last post, many of my colleagues commented, questioning whether investing in Private Equity (PE), Venture Capital (VC), or Hedge Funds is justified given the associated risks. On a whole asset class basis, the debate persists.
After my last post, many of my colleagues commented, questioning whether investing in Private Equity (PE), Venture Capital (VC), or Hedge Funds is justified given the associated risks. On a whole asset class basis, the debate persists.
- Diverse Risk Profiles: Like any other asset class, PE, VC, and Hedge Funds have their good and bad aspects. It's unfair to judge the entire asset class based solely on its failures. For instance, in public markets, numerous ETFs, mutual funds, and stocks have incurred losses for investors.
- Importance of Due Diligence: In the private realm, rigorous investment and operational due diligence are paramount. A robust due diligence process increases the likelihood of investing in high-quality funds. Neglecting this process and blaming the asset class for poor performance is contradictory. The quality of sourcing and screening processes also significantly influences outcomes.
- Long-Term Investments: PE and VC, unlike Hedge Funds and other private assets, are long-term illiquid investments. They play a crucial role in intergenerational wealth planning for Family Offices (FOs) and in liability-spend matching for institutions like Endowments and Foundations. Comparing their returns, risks, and statistics with short to medium-term liquid assets such as stocks and bonds can sometimes be misleading.
Risk Mitigation and Economic Volatility: Investing in PE and VC doesn't guarantee immunity from market volatility. While illiquid assets may shield investors from frequent market fluctuations, they're not insulated from broader economic downturns. Before investing, it's essential to conduct a thorough analysis of how these funds' returns might be impacted during economic turbulence.
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Eighteen years in investment management, M&A and financial technology. A CFA Charterholder, he leads investment analysis, valuation and fund structuring across Significa's advisory and investment practices, and teaches valuation and fund structures in the CVC Builder curriculum. Concurrently Chief M&A and Growth Officer at AlternativeSoft in London; co-founder of MarkeScope, which developed the first stock-screening solution to incorporate risk measures. Treasurer of CFA Society Egypt; BSc Electrical, Electronics and Communications Engineering, Cairo University.