Private Equity: Returns, Risks, and Investment Horizon

The private equity market, or “private equity” in English, attracts an increasing number of individual investors seeking higher potential returns.

But before investing in private equity, it is essential to understand its specifics. Unlike publicly traded stocks, investments in non-listed companies cannot generally be sold quickly.

So, what return can one realistically expect from private equity? What are the main risks to know? And for how long should capital be immobilized? We will review the characteristics of this investment to help you determine whether it can fit into your investment strategy.

What return can one expect with private equity?

If it attracts so many investors, it is primarily because private equity has historically shown a performance potential superior to that of many traditional asset classes. In return, one must accept a higher risk and immobilize capital for a longer period.

For investors wishing to invest in private equity with Fundora, a selection of funds allows investment in non-listed companies and diversification of one’s portfolio.

The return on private equity mainly comes from value creation in the non-listed companies financed by private equity funds, and then their sale with a capital gain.

The return on private equity depends on many parameters:

• the quality of the funded companies
• the know-how of the management company
• the economic context
• the timing of the sale of the stakes

Thus it is impossible to state a performance with certainty, and even less to guarantee it.

Table of private equity returns

Note: these ranges are indicative. Past performance is not indicative of future results.

Rather than chasing performance at all costs, it is preferable to consider private equity as a diversification sleeve within a global portfolio. Well selected and held for a sufficient period, it can contribute to improving the return potential of a long-term investment strategy.

What are the main risks of private equity?

Like any investment, private equity carries risks that must be understood before investing. While its potential return can be attractive, it comes with a higher level of uncertainty than many traditional investments.

The main risks of non-listed investments are as follows:

• Capital loss risk: as with stock market investments, it is possible to lose part or all of the invested sums if the funded companies encounter difficulties.
• Liquidity risk: shares of a private equity fund cannot usually be sold freely before its maturity. The investor must therefore be prepared to immobilize capital for several years.
• Highly variable performance: not all private equity funds yield the same results. Returns depend notably on the quality of the selected companies and the expertise of the management company.
• Economic risk: an economic slowdown, higher interest rates or a sector crisis can affect the growth of portfolio companies and reduce return prospects.
• Sometimes high fees: some private equity funds charge entry fees, management fees and a performance fee, which can weigh on the final return of the investment.

Therefore before investing, it is recommended to study the fund’s strategy, the fees charged, the experience of the management company, and to ensure good diversification of your portfolio.

How long should you immobilize your private equity investment?

Private equity funds typically have a lifespan of 8 to 10 years, and as shown in the table above, private equity returns are closely linked to the holding period.

The longer the investment horizon, the more time the funded companies have to grow and create value. This is why private equity should primarily be viewed as a long-term investment.

According to your investment horizon:

• Short term (2 to 5 years): not well suited. Private equity funds rarely have time to exit their stakes within such a short timeframe. An investment over this duration is unlikely to realize its full potential.
• Medium term (5 to 10 years): the ideal horizon. This is generally the duration preferred by most private equity funds. It allows fund managers to support the development of the companies before selling them in favorable conditions.
• Long term (10 to 15 years): a relevant strategy. Investors who do not need their capital for a long period can maintain exposure to private equity within a wealth-diversification approach, notably through investments in multiple funds.

Therefore before investing, it is essential to ensure that the invested sums will not be needed before the expected maturity. Private equity is mainly suitable for investors who can immobilize a portion of their savings for several years.

Our advice before investing in private equity

In our view, the main piece of advice before investing in private equity is to never allocate all of your capital to it. Even if this asset class can offer attractive return potential, it should primarily be considered as a complement to a diversified portfolio, for example consisting of listed stocks, ETFs, bonds, or safer placements such as savings accounts.

Diversification is also essential within your private equity sleeve itself. Not all non-listed companies succeed, and some may fail. Spreading your investment across several funds, sectors or vintages helps limit risk and improve the overall resilience of your portfolio.

In private equity, it is not the fund that promises the highest return that is necessarily the best choice, but the one that fits most intelligently into your overall diversification strategy.

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