Asset Location

Private Equity and Venture Capital

Asset Location

Some investors may wonder if they would be better off in private equity or venture capital, two asset classes that have nowhere near the amount of quality data that we have with public equities. Venture Economics, an information provider for equity professionals, compiled a 20-year data series of various types of private equity strategies for the period ending December 31, 2005. According to the survey, venture and private equity strategies generally performed well over the period. But, the premium relative to public securities appears rather small considering the higher risk, investment concentration, absence of liquidity, transparency and daily pricing. The results are shown in the table below.

It is important to note that the private equity and venture capital returns shown above are based on the funds that voluntarily reported their results to Venture Economics, so they are likely to be upwardly biased.

The May 2012 Ewing Marion Kauffman Foundation Report states that venture capital has delivered poor returns for more than 10 years. The title of the report is, "'We Have Met the Enemy, and He is Us' - Lessons from Twenty Years of the Kauffman Foundation's Investments in Venture Capital Funds and The Triumph of Hope over Experience".

The authors report that the Limited Partner (LP) model is broken, for which investment committees and trustees are responsible. To determine whether a VC fund provided a successful investment experience, the authors compared the return received to what would have been obtained from a comparable investment in the public equity markets, specifically the Russell 2000 Index of small cap stocks. The majority of funds (62%) studied failed to exceed the return of the Russell 2000 on an absolute (non-risk adjusted) basis. Not surprisingly, the authors found that the larger funds (those in excess of $400 million) were more likely to underperform. These results are not surprising given that the average VC fund fails to return investor capital after fees.

Finally, the table below shows how private equity stacked up against various equity indexes over the 25-year period ending March 31st, 2011. Again, the private equity results are based on voluntary reporting and are thus likely to be upwardly biased.