Introduction to Private Equity:
Over the last ten years private equity (“PE”) has increasingly become a significant
portion of most institutional portfolios globally. The private equity asset class is defined as investments in private
companies or partnerships that invest in them.
Since 1995, investors have committed more than US$1.8 trillion to U.S
private equity funds. Since 2000, the number of endowments, foundations, corporate and public pension plans
committing to the PE asset class has steadily increased to over 80% of all such institutions in North America.
Similarly, allocations to PE as a percentage of total portfolios has also steadily increased, with an average allocation
in North America increasing to over 9% in 2007. Progressive University endowments such as those of Yale,
Harvard and Princeton allocate as much as 20% of their endowment portfolios to PE.
Attractive Investment Returns:
There are two primary reasons why financial institutions invest in private equity.
First, PE returns have historically outperformed those of public equities by a large margin. As shown below, data
from Venture Economics indicate that PE has delivered more than a 17% annualized return from 1995-2006, outperforming public equities by more than 600 basis points per annum. Prior studies show similar outperformance.
Diversification Benefit:
Secondly, PE is not highly correleated to public equities, making it an excellent diversifier when added to a portfolio of
stocks and bonds. Despite its attractiveness, prior to investing, it is important to note that private equity has liquidity constraints and not be suitable for investors who do not seek to match asset and liability durations. Given these two core considerations, adding PE to a diversified portfolio is becoming increasingly common.
Monitoring and Reporting:
Monitoring investments in a diversified PE portfolio can be complex. There are
quarterly and annual reports and partnership tax returns for each partnership as well as quarterly and annual
conference calls and meetings with the GPs. A strong fund of funds manager constantly reviews reports, attends
meetings and conference calls and effectively aggregates and communicates information to investors via quarterly
reports and meetings with its investors.
The fund of funds manager also consolidates and simplifies monitoring
and administration of capital calls and distributions. Additionally, questions about the portfolio, individual funds or
companies can be directed to a single point of contact.
At Henshaw we believe in going several steps further in the
monitoring process, such that during trips through Africa, we enhance the overall information assembly by
augmenting data sources including: meetings with Ministry of Finance, Central Banks, commercial banks,
accounting and legal firms, Government Officials, underlying portfolio companies, competitors and MNCs active in
the space. The purpose is to constantly update and refresh the information context in concert with the dynamism
of the changing environment. This is reflected in our own communications with our investors.
In Conclusion:
PE is a very attractive asset class for long-term investors seeking to match long-dated assets and
liabilities. In order to squeeze the most return out of the exposure however, significant attention to detail is
required.
A specialized Fund of funds with the in-house dedicated expertise can eliminate or at least minimize
many of the “identifiable” risks associated with asset class. “Exogenous” risks such as currency devaluations,
government interventions, or major global price movements in a given sector, are difficult to hedge against,
particularly in Frontier emerging markets where the financial tools, like deep currency hedging markets are nonexistent
or too expensive for example. Nevertheless, as EMPEA data show, even in more volatile markets the
overall returns have exceeded listed benchmarks over long-dated period studies.
Henshaw welcomes the opportunity to assist you in your search for yield within this asset class.
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