The 5-Year Return on Private-Equity Funds: 48%

By Simeon Hyman | January 18, 2012
  • What's Happening

    What's Happening

    With Mitt Romney, former chief executive officer of Bain Capital, emerging as the leading Republican presidential candidate, private-equity firms have come under fire. At issue is whether the company restructurings in which such firms specialize are net job creators or job destroyers. What's not in doubt is that such ventures can be lucrative. For the five years ended September 2011, private-equity funds returned 48 percent, or roughly 8 percent per year, according to research by Cambridge Associates. The S&P 500 index lost 6 percent, or roughly 1 percent annually, over the same period. That's after fees, which typically amount to 2 percent of principal and 20 percent of profits.

    Photograph by Alex Brandon/AP

  • Why It Matters

    Why It Matters

    Such returns don't come without risk, and investors must wait years for a payoff. It's not uncommon for a private-equity investment to run, say, for five years before it plays out. And while the top-performing 25 percent of funds that made private-equity investments in 2008 have returned nearly 12 percent per year, the bottom quarter lost 6 percent. The hurdle to get into deals is high--to join a formal partnership requires a minimum investment that's typically in the tens of millions. If you invest through a wealth-management company, the minimum can fall to to $500,000.

    Graphic by Charlos Gary/Bloomberg

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    For investors who don't want to commit six figures, there are funds such as Powershares Global Listed Private Equity Portfolio and ALPS Red Rocks Listed Private Equity Fund. Publicly traded firms such as The Blackstone Group and KKR are a further option. Both stocks and index can be volatile. Over the same five-year period noted above, the S&P Listed Private Equity index lost about 10 percent of its value, largely due to the financial crisis. (The index fell by nearly 65 percent in the wake of the Lehman Brothers bankruptcy; the S&P dropped 40 percent.) On the flip side, since the stock-market bottom in March 2009, the Listed Private Equity index has gained 160 percent--double the S&P 500's performance.

    Graphic by Charlos Gary/Bloomberg

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