Private equity has the highest expected returns of both traditional and alternative investments. The asset class can play a key role in achieving higher total portfolio returns. The drivers that make the returns compelling are a combination of strategic and operational improvement, innovation, process-driven factors, leverage and public equity market returns . Capturing these returns requires some significant investments in resources, governance, and relationships (or the willingness to pay for someone else’s ability to implement a portfolio) as well as patience and a tolerance for illiquidity. Private equity investing has some of the highest implementation risks of any asset class. This area offers some exceptional potential rewards for sophisticated investors, but it is not necessarily suitable for all investors.
In this paper we will review some basic asset class characteristics, the return expectations, return drivers, evidence of outperformance, implementation considerations, and discuss the optimal use of private equity in a portfolio. Because private equity investing involves some concepts not found in other asset classes, we have provided a glossary of terms at the end of this paper.