(Source: Venture Economics, Morningstar Principia).

The returns of top private equity firms have been so solid that even private institutional endowments like that of Yale University expects almost a third of their portfolio return to come from the 17.5 % it had invested in private equity (Source: Yale Endowment 2003 report). The risks of private equity are often misunderstood. Even though a lot of wealthy people have been investing in private equity for many years, it is still an investment vehicle surrounded by many misunderstandings. Private equity funds cover a wide range of different sectors as well as a wide range of structures. There are leveraged buyout funds, venture capital funds, distressed debts funds and mezzanine financing funds to name several. Often, private equity is looked upon mistakenly by investors as a murky industry. To the contrary, the companies that comprise private equity funds typically have much higher transparency than publicly traded companies. Forensic accountants that work for private equity funds receive the type of access to companys accounting to search for weaknesses or hemorrhaging business units on a level that public equity analysts only dream about. Furthermore, many well known private equity firms attract top government cabinet officials and even ex-head of states to their boards, the benefits of which are quite self-explanatory. One such example is the Carlyle Group. At one point and time in recent history, the Carlyle Group could boast as board members or senior advisors, an ex-American president, a former British Prime Minister, an ex-Filipino president, an ex-U.S. Secretary of Defense and Deputy Director of the CIA, an ex-U.S. Secretary of State, and an ex-White House budget advisor. And this elite composition of board members is rather not the exception but more the growing rule of private equity firms. Because of the heavy political and corporate links of private equity funds, identifying those private equity firms with the most influential board members and advisors can be crucial to that particular private equity groups performance. So what's the downside you ask? Private equity is an exclusive club. Often minimum buy in levels are $250,000 and it is not rare for this level to be $500,000 or more. Also depending on the type of private equity fund you buy into, the liquidity may not be that great. For example if you buy into a leveraged buyout fund, investors often receive a return on invested capital after the private equity firm restructures a company and takes it IPO. This process could last six months for a quick turnaround or perhaps a couple of years. Obviously the reduced liquidity means that you have to be wealthy enough to afford longer timelines from the expected returns of private equity funds. However, these drawbacks can be offset by the potential for phenomenal returns. If you can afford it, private equity is an investment vehicle worth a second look.

2006 Global Market Opportunities