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Private Equity | The Asset Class

Within Private Equity there are different strategies depending on the profile of the companies acquired, the use of debt in the acquisition of the stake , the involvement of the management team, etc.

The Asset Class

Private Equity Asset Class

In general terms, the investment in Private Equity is channelled through three type of strategies:

Investments in Funds of Funds

which invest in a portfolio of specialized funds. Through the funds of funds, the investor obtains a wide diversification and significantly reduces “Regional”, “Sector/Industry” and “Manager” risks.

Investments in Specialized Funds

That in turn invest in unquoted companies. The investor obtains greater diversification by investing through the fund than by direct investment.

Direct Investments

In one or more unquoted companies.

Private Equity

Considerations

To invest in Private Equity, the investor should take into account a series of important considerations regarding these financial assets:

Terms

Investments with medium or long term maturities.

Liquidity

Limited access to liquidity.

Risk-return

Higher returns could sometimes imply assuming more risk.

Manager Selection

There is greater dispersion between returns obtained by the best managers and the average returns of the sector compared to other traditional asset classes.

Access

Access to the best managers is highly restricted.

Minimum investment

High minimum tickets are required to invest in Funds, making it difficult for medium size investors to build a diversified portfolio of Private Equity funds.

Complexity

Structures of Private Equity funds are very complex to analyse.

J-Curve

The investment typically takes place during the first 3-5 years, as capital is drawn down following the capital calls, and several years are needed for the investor to receive distributions from those investments as companies in the portfolio get sold (Break-even normally is reached between years 5 and 7). Additionally, the fact that management fees are calculated over committed capital and NAV is only calculated over the client´s drawn down capital, implies that NAV tends to be negative during the first years.

Main investors

Institutional clients are devoting increasing percentages of their asset allocation to Alternative Investments. Current allocations of Institutional clients at a Global level to Alternative Investments range between 15% and 30%.

 

Main investors in these asset classes are:

Insurance Companies

Pension Funds

Foundations and university Endowments

High Net Worth Clients

Investment Fund Managers

Financial Institutions / HNW

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