How risky is private equity?

Risk in private equity is more complex and far less risky than is often perceived, according to ground-breaking research published today by the British Private Equity & Venture Capital Association (BVCA).
The study, conducted by Montana Capital Partners, explores and analyses the different types of risk that can affect private equity investments.
The paper finds that, owing to the illiquid, close-ended nature of private equity funds, volatility risk is not the most appropriate metric to look at when considering risk in private equity.
Rather, the risk to investors of losing capital, and the funding risk posed by irregularly-timed and irregularly-sized cash flows, are far more relevant issues to consider, and should be given greater significance when measuring and managing risk in private equity investments.
The paper provides an empirical analysis of these risks in the industry as a whole, performing a comprehensive study based across three different data sets and through the creation of 5,000 virtual portfolios using real-life private equity performance data and testing the various outcomes.
The full study can be found here.
Findings include:
- Contrary to the beliefs of regulators and others, volatility in private equity has been lower than in the public markets for a period of over 20 years;
- Across a diversified portfolio of fund investments, the risk of losing capital can be brought down below 1%, and that levels of funding risk become predictable and manageable;
- Using an innovative new analysis – ‘realisation risk’ – the paper also shows that for a suitably diversified portfolio of fund investments, the risk of an investment not being able to realise its valuation can be brought below 1%.
Christian Diller, author of the study, and partner and Co-founder of Montana capital Partners, said:“Based on three data sets we were able to show robust statistical results that private equity is less risky than it is often perceived. We were able to show that historically the risk for a long-term investor of losing parts of its invested capital has been close to zero for a diversified portfolio. Also the newly created measure for the ‘realisation risk’ shows that the risk that an investor will not receive its current value as distributions is below 1% for a well-diversified portfolio. These new findings are positive news for all institutional investors who are looking fora return seeking long-term alternative in a low interest rate environment.”
Joe Steer, Director, Research, BVCA, said:
“The findings of this report have far-reaching implications for those considering the risk of investing in private equity. Taken together,these results demonstrate that private equity is less risky than is often supposed by some market participants, and that risk in the asset class should be conceptualised in a different way than it is currently.”
- The study can be found here.
- The British Private Equity and Venture Capital Association (BVCA) is the industry body for the UK private equity and venture capital industry. The BVCA has over 500 member firms, representing the vast majority of UK-based private equity and venture capital firms and their advisers.