Within the institutional investor community, private equity is constantly having to justify its existence. As a relative newcomer to most portfolios, its proponents must prove that it deserves a spot alongside fixed income and public equity.
Private equity is of course not without its charms, but it is particularly ill-equipped to argue its case against competing asset classes. Why? Private equity is young and number-light. The data set available for scrutiny gets rather sparse if one looks back only to the early 1990s. Then there's the perennial problem of sorting realised IRR from unrealised IRR.
But things are looking better for the asset class, self-justification- wise. Increasingly, those that study private equity are able to find consistencies among what might be called “good” private equity portfolios. Obviously, access to the top managers is most important, but in general, those institutions that have boldly accepted the perceived risk of private equity – and in particular venture capital – have enjoyed the fruits of the asset class' strongest performance. This issue's cover story (p. 43) explores these and other reasons behind why endowments seem to be the most successful backers of private equity funds.
This leads us naturally to the swirling vortex of risk and reward in private equity – Menlo Park, California. Last month, Private Equity International's New York team travelled to Menlo Park, California, to moderate a roundtable discussion joined by some of venture capital's keenest minds (p. 50). Make no mistake – Silicon Valley investors are keeping their eyes on the ball in that they see young, growing companies has the means to profit, not mere vehicles of innovation for its own sake.
If you think private equity in general has a hard time explaining itself, you should see the situation in Russia, where the small handful of GPs face a barrage of questions from potential backers about the risks involved with their chosen geography. As Art Janik learned (p. 70), no experienced Russia hand sugar-coats the risks there, but balanced against the incredible opportunities in this vast and transforming economy, an LP with a stomach for a bit of uncertainty may want to find room for a Russian allocation.