Back to Blog
Drawdown private equity5/11/2023 ![]() However, our results suggests these are hard, if not impossible, to harvest in practice. By contrast, when we calibrate the fundraising cycle based on recent levels of fundraising scaled by the value of the stock market, a counter-cyclical (pro-cyclical) commitment strategy generates a multiple 1.86 (1.74) and a PME of 1.17 (1.09), quite comparable to the figures for the neutral strategy.įor venture capital, the more pronounced impact of the fundraising cycle on subsequent performance identified by our analysis and earlier research suggests even higher potential timing gains in VC than in buyout. In other words, 1.15 as much wealth as would have resulted from putting equivalently-timed cash in the public equity market index. Adjusted for the opportunity costs of not investing in the public markets, that multiple translates to a 1.15 public market equivalent (PME, see Kaplan and Schoar) of relative performance for the neutral strategy. A neutral strategy, which does not time commitments, pays back $1.80 for every dollar invested (a multiple of 1.80 of absolute performance). We create a range of potential timing strategies with rules on how much to commit and whether this varies based on observable conditions in the private and public markets.įor buyouts, private equity investing beats public market returns, consistent with prior research, but the extra benefits of timing strategies are modest. These fall well short of the gains that might be hoped for from statistical patterns found in research moreover, they must be weighed against organizational difficulties encountered in constantly shifting private equity allocations. We show that there are only modest performance benefits from commitment strategies that investors might actually use to harness potential timing gains. This allows us to explore if ‘commitment timing’ based on market cycles can improve performance and is the first study investigate investor timing in private equity using comprehensive data spanning three decades. We create the full series of cash flows and net asset values that an LP would have experienced for a variety of capital commitment strategies. ![]() This paper uses data from Burgiss on over 3,500 private equity funds (both buyout and venture capital) to investigate investor timing in closed-end drawdown fund structures. Consequently, there is substantial ‘commitment risk’ when the investor has pledged capital but does not control the timing of when the money is put to work or returned. stocks) can typically be purchased or sold almost immediately, limited partners who commit capital to private equity funds face significant delays and uncertainty surrounding the timing of purchases and sales, which are controlled by the general partner (see Gredil Robinson and Sensoy). Unlike public markets in which assets (e.g. A second potential friction arises from the nature of delegation in the asset class. LPs can suffer from internal agency problems that prevent them from committing to so-called `disciplined’ capital allocation strategies. The first potential agency friction arises inside the organizational structure of the investor (the limited partner, or LP, in the fund) itself. Creating time-varying exposure to the asset class is potentially complicated by two sets of agency frictions that are especially important in this institutional setting. While this question is of immense practical interest to the investor community, it also reflects the deeper economic forces at work in the sector. ![]() This raises an important question: is it possible to market-time the allocations to private equity to avoid the cyclicality of performance? ![]() The aggregate amount of capital committed to the sector varies substantially from peak to trough, and many have observed that periods of high fundraising activity are followed by periods of low absolute performance for the asset class (see Harris, Jenkinson, and Kaplan, among others). Private equity markets are highly cyclical.
0 Comments
Read More
Leave a Reply. |