ECON 1 Lecture Notes - Lecture 3: Private Equity Fund, Peer Group, Performance Measurement
Document Summary
Diversified portfolios require minimum level of capital commitment. Investors are required to fund only a small percentage of their total capital commitment at the beginning. Just-in-time drawdowns are used to minimize amount of time that funds hold uninvested cash, which would decrease irr. Investors need liquid assets to meet obligations, whenever called. Drop in the beginning is due to the low capital call at the beginning, operational expenses and management fees. This is one curve, usually multiple of those are succeeding, creating positive graph through the years, due to different vintage years! Successful managers take advantage of: illiquidity, lack of public information, business and technology risk associated with new companies. Persistence in top performance is existent (table below. ) Top performing managers have delivered significant outperformance relative to average private equity managers. Not entirely unrelated, but significant differences can be found. Same diversification principles as for the traditional asset space. Potential benefits as in the public market.
